The volatile nature of equity markets makes it vital to maintain a diversified portfolio of stocks spread across market caps. As you may be aware, companies belonging to different market caps usually vary in performance over certain time periods. Therefore, diversifying your investments across market caps, preferably through a Flexi-cap Fund, can reduce portfolio risk and mitigate volatility, thereby maximizing portfolio returns over the long term.

The flexible investment mandate of Flexi-cap Funds gives fund managers greater scope to identify alpha-generating opportunities from a large universe of stocks which can reward investors with superior risk-adjusted returns over the long term.

Parag Parikh Flexi Cap Fund is a popular Flexi-cap fund that focuses on long-term capital appreciation from undervalued stocks available at a decent margin of safety and offers significant diversification to offshore stocks as well.

Graph 1: Growth of Rs 10,000 if invested in Parag Parikh Flexi Cap Fund 5 years ago

Past performance is not an indicator of future returns
Data as on March 14, 2022
(Source: ACE MF) 

Launched in May 2013, the erstwhile Parag Parikh Long Term Equity Fund is now known as Parag Parikh Flexi Cap Fund. Classified under Flexi-cap Funds, the fund has a mandate to invest dynamically across large-cap, mid-cap, and small-cap stocks. However, its orientation remains more towards the value style of investing, whereby it aims to invest in quality stocks available at reasonable or attractive valuations. Apart from domestic equities, the fund also invests in international stocks to give investors the benefit of geographical diversification. The focus towards value stocks available at a decent margin of safety and a buy-and-hold investment approach has helped Parag Parikh Flexi Cap Fund to keep the overall volatility low, thereby generating superior risk-adjusted returns for its investors. An investment of Rs 10,000 in Parag Parikh Flexi Cap Fund five years back would have appreciated to Rs 25,251, growing at a CAGR of 20.4%. The fund performed remarkably well to curb the downside during the 2020 market crash. Moreover, it has done well in the current bull phase by outscoring the benchmark and many of its Flexi-cap peers by a significant margin.

Table: Parag Parikh Flexi Cap Fund’s performance vis-á-vis category peers

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Quant Flexi Cap Fund	120	37.35	62.88	29.19	21.19	18.56	24.53	0.31
PGIM India Flexi Cap Fund	3,637	24.02	46.97	26.86	19.44	15.93	22.91	0.30
Parag Parikh Flexi Cap Fund	20,130	25.29	43.81	24.95	20.37	17.12	19.10	0.32
UTI Flexi Cap Fund	24,043	11.75	32.65	20.13	16.94	13.22	21.79	0.23
Union Flexi Cap Fund	935	17.16	33.79	19.37	14.87	10.46	21.16	0.23
Canara Rob Flexi Cap Fund	6,763	17.21	31.10	19.35	17.37	12.82	19.81	0.24
Axis Flexi Cap Fund	10,460	14.43	25.58	19.25	—	—	18.35	0.23
IDBI Flexi Cap Fund	377	23.98	33.34	19.06	15.56	11.70	20.11	0.23
DSP Flexi Cap Fund	7,349	10.41	26.14	18.23	14.97	12.38	21.94	0.22
JM Flexicap Fund	186	14.82	26.60	17.97	14.36	13.21	21.34	0.21
NIFTY 500 – TRI		15.42	34.09	16.29	14.22	11.88	22.42	0.19

Returns are point to point and in %, calculated using Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on March 14, 2022
(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.

Parag Parikh Flexi Cap Fund has ranked among the list of top-quartile performers and has shown a stark outperformance over its benchmark across various market phases and cycles. Over the last 3-year, 5-year, and 7-year period, the fund has outpaced the benchmark and the category average by a substantial margin of 6-8 percentage points in CAGR. Even on the shorter 1-year and 2-year period, Parag Parikh Flexi Cap Fund has outpaced the broader benchmark by a CAGR of around 10 percentage points.

With a Standard Deviation of 17.12%, the fund’s volatility has been among the lowest in the category and is far below the benchmark (22.42%) and the category average of 21.44%. Moreover, the Sharpe Ratio of the fund at 0.32 is currently the highest in the category and much ahead of its benchmark. With this, Parag Parikh Flexi Cap Fund clearly stands out with its potential to deliver superior risk-adjusted returns for its investors.

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 29.8% 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 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 the management, and protection of minority shareholders. 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 Parag Parikh Flexi Cap Fund’s holdings have been in the portfolio for multi-years now.

Graph 2: Top portfolio holdings in Parag Parikh Flexi Cap Fund

Holding in (%) as of February 28, 2022
(Source: ACE MF) 

Parag Parikh Flexi Cap Fund makes its investments with a long-term perspective and follows a buy-and-hold investment strategy to realize the full potential of the stocks. Among domestic equities, the fund holds top exposure in Bajaj Holdings & Investment (8.2%), ITC (8%), Axis Bank (5.4%), ICICI Bank (5.3%), HCL Technologies (5.3%), HDFC Bank (5.2%), and Hero MotoCorp (5%). These stocks together account for around 42.4% of its assets.

What differentiates Parag Parikh Flexi Cap Fund from other Flexi-cap schemes is its exposure to foreign companies, which offers an element of geographical diversification to the investor’s overall portfolio. Alphabet Inc. is the fund’s top holding and largest foreign exposure (about 9% of its corpus), followed by Microsoft Corp. (7.9%), Amazon (7.4%), Facebook (4.7%), and Suzuki Motor Corporation (0.9%).

Among domestic equities, Parag Parikh Flexi Cap Fund benefitted the most from its holdings in Indian Energy Exchange and Bajaj Holdings & Investment, whereas ICICI Bank, HCL Technologies, ITC, Sun Pharma, among others also boosted the fund’s performance in the last one year.

About 29.8% of the fund’s portfolio is exposed to offshore equities. Banking and Finance together account for another 31.5% of its assets, followed by Power, Consumption, Infotech, Pharma, and Auto & Auto Ancillaries.

Suitability

Parag Parikh Flexi Cap Fund’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. The high alpha generated over the past few years has been exceedingly rewarding for long-term investors, even though the fund is not among the best in the bull periods.

The fund’s focus on fundamentally strong stocks across market caps and geographies enables it efficiently face the dynamic market sentiments. More importantly, the fund management gives a high preference to safety over returns and does not compromise on the risk aspects to generate higher returns. With experienced fund managers at the helm, the fund seems to be in capable hands.

Parag Parikh Flexi Cap Fund is suitable for pure long-term investors looking for a value-oriented Flexi-cap fund that can offer optimal diversification along with a decent margin of safety and stability.

Update on Parag Parikh Flexi Cap Fund

PPFAS Mutual Fund has announced the opening up of acceptance of fresh transactions in its flagship scheme ‘Parag Parikh Flexi Cap Fund’ , with effect from March 15, 2022.

Despite SEBI’s directive on stopping fresh investments abroad, still there has been no action by the RBI about the reconsideration of overseas investment limits. Accordingly, the mutual fund industry has no clear visibility about the revision of overseas investment limit. However, the fund house has taken this decision taking into consideration the investors’ interest and preference about benefiting from investment opportunity in Parag Parikh Flexi Cap Fund after the recent market crash.

As there is no change in the overseas investment limit, the fresh net inflows in the scheme will have to be invested primarily in domestic equities. Accordingly, the weightage of foreign stocks or offshore equities in Parag Parikh Flexi Cap Fund is expected to come down gradually over time. The fund house has mentioned that it will consider rebalancing the portfolio as per the then prevailing situation and valuations as and when overseas investment limits are increased.

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.

This article first appeared on PersonalFN here