How to optimise returns while managing risk with flexi-cap funds

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Flexi cap funds are equity funds that possess the flexibility to invest across market capitalisations and potentially adapt to changing market environments. But how do these funds manage risk? Well, thanks to their ability to shift assets between large, mid, and small-cap stocks, flexi cap funds can help investors navigate volatile periods and optimise the return potential over the long run.

Read on to learn more about how to optimise flexi cap fund returns.

  • Table of contents
  1. Understanding flexi cap funds
  2. Tax treatment of flexi cap funds
  3. Tips to optimise returns with flexi cap fund
  4. Managing risks in flexi cap investing
  5. Principles for tax efficient flexi cap investing
  6. FAQs

Understanding flexi cap funds

Flexi cap funds, as the name suggests, have the flexibility to invest a minimum of 65% of their assets in equities across large, mid, and small-cap companies. This allows fund managers to shift allocations between different market caps based on their perception of better investment opportunities and changing market conditions. While this flexibility can optimise the return potential, it also increases the relative volatility of flexi cap funds.

Tax treatment of flexi cap funds

Investments in flexi cap funds enjoy similar tax treatment as other equity mutual funds in India. Any profits earned from redemptions held for over one year are considered long-term capital gains (LTCG) and taxed at 10% for amounts above Rs. 1 lakh. Short-term capital gains (STCG) on redemptions held for less than one year are taxed at 15%. Furthermore, the tax treatment make flexi cap funds suitable for long-term wealth creation and tax-efficient investing in India.

Tips to optimise returns with flexi cap fund

When it comes to optimising the return potential from flexi cap funds while managing risks carefully, here are some expert-recommended strategies:

  • Do thorough due diligence of the fund, manager, and parent organisation based on long-term performance across market cycles.
  • Invest via SIPs for rupee cost averaging rather than lumpsums to reduce volatility impact.
  • Set longer 5-10 year investment horizons to potentially avail the benefits of compounding.
  • Stay invested during corrections through SIPs and use volatility to increase investments.
  • Monitor fund performance quarterly and replace underperformers to boost the long-term return potential.
  • Seek advice from experts during phases of high market uncertainty for prudent decision making.

Managing risks in flexi cap investing

  • Start SIPs early and maintain discipline to ride out volatility over long periods.
  • Diversify flexi cap investments across multiple funds to reduce fund-specific risks.
  • Avoid chasing short-term performances and stick to funds with consistent track records.
  • Create contingency funds for unforeseen needs rather than prematurely redeeming flexi cap investments.
  • Consult financial advisors to determine optimal equity exposure based on risk profile and financial goals.

Principles for tax efficient flexi cap investing

  • Consult experts annually for optimal tax planning like loss harvesting or switching between funds/categories.
  • Book long-term gains only for planned large expenses rather than regular income needs.
  • Maintain detailed records of investments, gains/losses for easy tax compliance and return filings.

Conclusion

A disciplined and diligent approach towards investing in flexi cap funds, as outlined above, can help maximise the return potential through the power of compounding, while effectively managing risks. With the appropriate asset allocation and a patient long-term investment timeframe, investors can consider flexi cap funds as a balanced and tax efficient approach to potential wealth creation.

FAQs:

Q. What is the difference between tax-efficient investing and regular investing?
Tax-efficient investing means considering potential tax implications when making investment decisions, to minimise how much you pay in taxes. With regular investing, you focus solely on factors like expected returns, risks, and investments that align with your goals and risk tolerance without regard for taxes. Tax-efficient strategies aim to defer taxes for as long as possible by favoring investments with tax benefits.

Q. Can tax-efficient investing completely eliminate taxes on investments?
While tax-efficient investing aims to minimise taxes, it does not allow investors to completely eliminate taxes on their investment returns. Some tax liability will likely still exist no matter the strategies used. However, tax-efficient practices can significantly lower an investor's overall tax bill compared to just focusing on returns.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.