Parag Parikh Flexi Cap Fund: Safeguarding Portfolio with Diversification
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As India grapples with the second wave of COVID-19, the domestic equity market has turned volatile. On the other hand, the US equity market is on an upward trajectory stoked by speedy vaccine drive and improving prospects of economic growth.
Notably, Indian market and the US market have a low correlation; so when the domestic market underperforms you can offset the losses by gaining exposure to the US market (or any other market that has a low correlation to the domestic market). This highlights that apart from diversifying assets across categories and sub-categories, one can consider investing in international equities to gain from geographical diversification. Apart from diversification, investing in International equities can also provide a hedge against Rupee depreciation.
Many mutual fund houses now offer schemes that invest in international equities/index to provide investors with an opportunity to benefit from global exposure. With this, you can gain from the expertise of professional fund managers and teams who do the difficult task of selecting securities and portfolio monitoring.
Parag Parikh Flexi Cap Fund (PPFCF) is a value-oriented Flexi-cap fund that aims to provide long term capital appreciation from a portfolio that has a blend of domestic and international equities.
Graph 1: Growth of Rs 10,000 if invested in Parag Parikh Flexi Cap Fund 5 years ago
Classified under flexi-cap funds category, PPFCF, popularly known as Parag Parikh Long Term Equity Fund, is mandated to invest dynamically across large-cap, mid-cap, and small-cap stocks. The fund's orientation remains more towards the value style of investing, whereby it aims to invest in quality stocks available at reasonable or attractive valuations. What differentiates PPFCF from the rest is that it does not limit the portfolio to only domestic equities, it invests nearly one-third of its corpus in stocks of offshore companies. The focus towards value stocks available at decent margin of safety has helped PPFCF keep the overall volatility low, while its above average performance has helped the fund generate superior risk-adjusted returns for its investors. An investment of Rs 10,000 in PPFCF five years back would have appreciated to Rs 24,358, a CAGR of 19.5%. A similar investment in the benchmark Nifty 500 - TRI would have grown to Rs 20,186 a CAGR of about 15.1%.
Data as on April 28, 2021
(Source: ACE MF)
Table: Parag Parikh Flexi Cap Fund's performance vis-à-vis category peers
Returns are point to point and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on April 28, 2021
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
Despite high volatility witnessed in the equity markets over the last few years, PPFCF has ranked among the list of top quartile performers and has shown a stark outperformance over its benchmark and most of its peers. PPFCF has registered consistency in terms of outperformance across bull and bear market phases. Over the long term horizon of 5-year and 7-year periods, the fund has generated substantial alpha of around 4.5 percentage point in compounded annual growth rate (CAGR) over its benchmark Nifty 500 - TRI as well as category peers across longer time periods. Even over the short term it has outpaced the benchmark and many of its peers with remarkable margin.
PPFCF holds an unbeatable track record on the risk-return parameters. With a Standard Deviation of 18.95, the fund's volatility has been lowest in the category and is far below the benchmark. Moreover, the Sharpe Ratio of the fund at 0.24 is the highest in the category and much ahead of its benchmark.
Investment strategy of Parag Parikh Flexi Cap Fund
Earlier categorised as multi-cap fund it has now reclassified as a Flexi-cap fund. However, the change in mandate has in no way impacted the investment strategy and style that the fund follows.
PPFCF 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 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 30.2% 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 equity schemes.
While picking stocks for the portfolio, the fund managers follow an active investment strategy primarily based on fundamental research driven bottom-up stock selection approach. They focus on key parameters like growth opportunities, sustainable competitive advantage, industry structure, margins, quality of the management, and protection of minority shareholders. The fund managers give high importance to 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 margin of safety, preserve capital and generate superior growth.
The fund managers have high conviction and keep a pure long-term focus on each of their investments. That's the reason why many of its holdings have been in the portfolio for multi-years now.
Graph 2: Top portfolio holdings in Parag Parikh Flexi Cap Fund
Holding in (%) as on March 31, 2021
(Source: ACE MF)
PPFCF makes its investments with a long term perspective and follows a buy and hold investment strategy, to realize the full potential of the stocks it has bought in the portfolio. Among domestic equities the fund holds top exposure in ITC (8.3%), Bajaj Holdings & Investment (7.4%), Indian Energy Exchange (6%), Persistent Systems (5.6%), Hero MotoCorp (4.7%), and Multi Commodity Exchange of India (4.6%). These stocks together account for around 36.6% of its assets.
Among domestic equities, names like Persistent Systems, Mphasis, HDFC Bank, Bajaj Holdings & Investments, Hero MotoCorp, Balkrishna Industries, Axis Bank, ICICI Bank, among others have boost the fund's performance over the one year.
About 30.2% of PPFCF's portfolio is exposed to offshore equities. Alphabet Inc. is the fund's top holding and largest foreign exposure (about 8.9% of its corpus), followed by Microsoft (8%), Facebook (6.5%), Amazon (4.6%), and Suzuki Motor Corporation (2.3%).
Among sectoral holdings, Banking and Finance together account for around 25% of its assets, followed by Infotech, Consumption, Power, Pharma, Auto, and Auto Ancillaries.
Suitability
PPFCF's ability to stand strong even during depressed market conditions has enabled it to generate meaningful alpha over its benchmark and thereby has exuded confidence among its investors. PPFCF's focus across market caps and geographies enables it to remain flexible enough to deal with the changing market sentiments.
During tough market corrections, the fund has been found buying into the beaten down stocks, thus positioning itself to capitalise on the recoveries. Also, if valuation soars beyond acceptable levels, the fund takes proactive measures to deal with the uncertain conditions. What is more important is that the fund management gives high preference to safety over returns. The fund managers do not compromise on the risk aspects to generate higher returns.
It is suitable for pure long term investors looking for a fund that can offer diversification along with decent margin of safety and stability.
Warm Regards,
Divya Grover
Research Analyst
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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.
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