Parag Parikh Flexi Cap Fund: Protecting Downside Risk through Value-oriented Approach

Market cap performance differs every year; sometimes large-caps outperform, while other times, it could be mid and small-caps. So, if you diversify across the market cap, viz. large-cap, mid-cap, and small-cap, you can lower the impact of volatility on your portfolio and thereby earn better risk-adjusted returns. Investing in Flexi Cap Funds is a great way to diversify your portfolio across market caps. These funds have the flexibility to increase/decrease exposure to a particular segment depending on market conditions, liquidity conditions, and valuations.

To know about PersonalFN's list of the best Flexi Cap Funds to invest in 2023, click here.

Parag Parikh Flexi Cap Fund is a popular Flexi Cap Fund that has a history of creating solid wealth for its investors in the long run by following a value-oriented investment approach.

Past performance is not an indicator of future returns
March 28, 2023
(Source: ACE MF)

Despite its sub-par performance in the last one year, Parag Parikh Flexi Cap Fund ranks among top quartile performers across longer time periods and has displayed a stark outperformance vis-a-vis its benchmark and most of its category peers. Over the last 3-year, 5-year, and 7-year periods, Parag Parikh Flexi Cap Fund has delivered returns at a CAGR of around 33.7%, 17.9%, and 17.7%, respectively. With this, the fund has generated substantial alpha over its benchmark Nifty 500 - TRI and has also outpaced most of its category peers. Even though the fund has trailed the benchmark and some of its peers in the last 1- year, it has the potential to bounce back with superior gains.

Parag Parikh Flexi Cap Fund holds an unbeatable track record on the risk-return parameters. With a Standard Deviation of 16.87%, the fund's volatility has been among the lowest in the category and is far below the benchmark (19.16%) and the category average of 18.65%. Moreover, the Sharpe Ratio of the fund at 0.40 is currently among the highest in the category and much ahead of its benchmark. Parag Parikh Flexi Cap Fund clearly stands out among Flexi Cap Funds with the potential to deliver superior risk-adjusted returns for its investors.

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Investment strategy of Parag Parikh Flexi Cap Fund

Parag Parikh Flexi Cap Fund seeks to generate long-term capital appreciation from an actively managed portfolio primarily of equity and equity-related securities. Its investment universe is not restricted to any specific sector, market capitalisation or geography. Other than domestic equities, the fund has the flexibility to invest up to 35% of its assets in foreign securities. At times the fund has invested about a third of its corpus in equity and equity-related instruments of offshore blue-chip companies (current exposure is about 16% of the corpus). However, an average of 65% of its corpus needs to be invested in listed Indian equities in order to benefit from the favourable Capital Gains tax treatment accorded to domestic equity schemes.

While picking stocks for the portfolio, the fund managers follow an active investment strategy primarily based on a fundamental research-driven bottom-up stock selection approach. They focus on key parameters like growth opportunities, sustainable competitive advantage, industry structure, margins, quality of management, and protection of minority shareholders. The fund managers give high importance to the intrinsic value of the business and endeavour to purchase stocks that represent a discount to this value in an effort to create value for investors, maintain a margin of safety, preserve capital, and generate superior growth. They carry high conviction and keep a pure long-term focus on each of the stock holdings in the fund's portfolio. That's the reason why many of the stocks have been part of the portfolio for multi-years now.

Parag Parikh Flexi Cap Fund makes its investments with a long-term perspective and follows a buy-and-hold investment strategy to realise the full potential of the stocks it has bought in the portfolio. Among domestic equities, the fund held top exposure in HDFC Ltd. (7.8%), ITC (7.6%), Bajaj Holdings & Investment (7.5%), ICICI Bank (5.6%), HCL Technologies (5.3%), and Axis Bank (5.1%), as of February 28, 2023. These stocks collectively accounted for around 39% of its assets. The fund held a higher cash balance of around 10-20% in the last few months amid relatively expensive valuations in the equity market.

What differentiates Parag Parikh Flexi Cap Fund from other Flexi-cap schemes is its exposure to foreign companies, which offers an element of diversification benefit to the investor's overall portfolio. Microsoft Corp. is currently the fund's largest foreign exposure (with allocation of about 4.9% of its corpus), followed by Alphabet Inc. (4.5%), Amazon.com (3.3%), Meta Platforms (2.8%), and Suzuki Motor Corporation (0.6%).

Among domestic equities, ITC, Bajaj Holdings & Investment, Indian Energy Exchange, and ICICI Bank turned out to be top contributors to Parag Parikh Flexi Cap Fund's gains, along with Sun Pharma, Balkrishna Industries, HCL Technologies, Axis Bank, and ICRA that boosted the fund's performance over the last couple of years. On the other hand, the fund's holdings in Hero MotoCorp, Multi Commodity Exchange, and Ipca Laboratories were among the stocks that eroded some of its gains.

Banking and Finance together account for 32.9% of its assets, followed by Consumption, Power, Mining, Infotech, Auto & Auto Ancillaries, and Pharma, among others. Currently, about 16% of Parag Parikh Flexi Cap Fund's portfolio is exposed to offshore equities. It is important to note that RBI has not announced any plans to increase the overseas investment limit for the Indian mutual fund industry. Accordingly, the fresh net inflows in Parag Parikh Flexi Cap Fund have been invested primarily in domestic equities. Therefore, the weightage of foreign stocks/offshore equities in the scheme has come down gradually over the last one year from around 30% earlier to around 16% at present. The fund house has mentioned that it will consider rebalancing the portfolio as per the prevailing situation and valuations as and when the overseas investment limits are increased.

Suitability

Parag Parikh Flexi Cap Fund has registered consistency in terms of outperformance across bull and bear market phases. Following a conservative investment approach, Parag Parikh Flexi Cap Fund has done remarkably well in curbing the downside during market corrections, as seen in the 2015-16 bear phase and even in the 2020 market crash. In the recent bull phase too, Parag Parikh Flexi Cap Fund outpaced the benchmark and has outscored many of its Flexi-cap peers by a significant margin. Overall, the fund has done well to reward its long-term investors over the complete market cycle.

Parag Parikh Flexi Cap Fund's bet on fundamentally sound undervalued stocks has benefited the fund so far. What is more important is that the fund management gives a high preference to safety over returns. The fund managers do not compromise on the risk aspects to generate higher returns. With experienced fund managers at the helm, Parag Parikh Flexi Cap Fund seems to be in capable hands.

Parag Parikh Flexi Cap Fund is suitable for investors looking for a cautiously managed Flexi Cap Fund with the flexibility to offer some diversification to offshore equities over a longer time horizon of at least 5 to 7 years.

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014

About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc. and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services.

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of the second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, its subsidiaries and its Directors.

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Details of associates

1. Money Simplified Services Private Limited;

2. PersonalFN Insurance Services India Private Limited;

3. Equitymaster Agora Research Private Limited;

4. Common Sense Living Private Limited;

5. Quantum Advisors Private Limited;

6. Quantum Asset Management Company Private Limited;

7. HelpYourNGO.com India Private Limited;

8. HelpYourNGO Foundation;

9. Natural Streets for Performing Arts Foundation;

10. Primary Real Estate Advisors Private Limited;

11. HYNGO India Private Limited;

12. Suresh Lulla;

13. I V Subramaniam.

1. ‘subject company’ is a scheme on which a buy/sell/hold view or target price is given/changed in this Research Report;

2. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company; except for some of the Research Analysts holding units of Parag Parikh Flexi Cap Fund;

3. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report;

4. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However, any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront / annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices.

1. Neither QIS nor it's Associates have received any compensation from the subject Company in the past twelve months;

2. Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company;

3. Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company;

4. Neither QIS nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

5. Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report

1. The Research Analyst has not served as an officer, director or employee of the subject Company.

2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.

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Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. & Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021

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