Flexi-cap Funds have the flexibility to invest across market cap segments, viz. large-cap, mid-cap, and small-cap, without any upper or lower limit. Diversifying your investments across market caps, preferably through a Flexi-cap Fund, can reduce portfolio risk and mitigate volatility, thereby maximising portfolio returns over the long term.

Depending on market conditions, liquidity conditions, and valuations, the fund manager of a Flexi-cap Fund can manoeuvre among different categories of market cap. This 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 scheme in the Flexi Cap Fund category that focuses on long-term capital appreciation from undervalued stocks and offers 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 September 13, 2022
(Source: ACE MF) 

Launched in May 2013, Parag Parikh Flexi Cap Fund (erstwhile Parag Parikh Long Term Equity Fund) is a Flexi Cap Fund that invests 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 Parag Parikh Flexi Cap Fund from the rest is its ability to not limit the portfolio to only domestic equities. The fund invests up to one-third of its corpus in stocks of offshore companies. The focus towards value stocks available at a decent margin of safety has helped Parag Parikh Flexi Cap Fund keep the overall volatility low, while its above-average performance has helped it to generate 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 23,846, at a CAGR of 19%. A similar investment in the benchmark Nifty 500 – TRI would have grown to Rs 18,726 at a CAGR of about 13.4%. Despite following a cautious investment strategy, Parag Parikh Flexi Cap Fund has generated substantial alpha over its benchmark.

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	538	12.74	46.52	40.68	19.62	21.71	25.20	0.36
PGIM India Flexi Cap Fund	5,081	1.02	33.54	30.08	17.33	16.83	23.52	0.30
Parag Parikh Flexi Cap Fund	25,996	2.83	29.58	26.62	18.97	18.30	20.32	0.30
IDBI Flexi Cap Fund	408	9.73	32.74	23.94	14.77	13.72	21.58	0.25
Franklin India Flexi Cap Fund	10,245	10.41	36.34	23.29	13.38	14.04	24.06	0.23
Canara Rob Flexi Cap Fund	8,340	2.61	27.83	23.24	15.25	15.34	20.51	0.25
UTI Flexi Cap Fund	26,503	-4.18	28.04	23.22	15.71	14.86	22.95	0.24
Union Flexi Cap Fund	1,290	3.78	29.46	23.14	14.21	13.74	21.81	0.24
Edelweiss Flexi Cap Fund	1,030	7.48	31.75	22.13	14.54	15.44	22.16	0.22
JM Flexicap Fund	221	9.47	33.90	21.69	13.00	16.22	22.58	0.22
NIFTY 500 – TRI		6.86	30.22	21.40	13.36	14.69	23.14	0.21

Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on September 13, 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.

Despite the high volatility witnessed in the equity markets over the last few years, Parag Parikh Flexi Cap Fund has ranked among the list of top quartile performers and has shown a stark outperformance over its benchmark and most of its category peers. Over the last 3-year, 5-year, and 7-year period, Parag Parikh Flexi Cap Fund has delivered returns at a CAGR of around 26.6%, 19%, and 18.3%, respectively, thereby generating substantial alpha over its benchmark Nifty 500 – TRI and also outpacing most of its category peers. Even though the fund has trailed the benchmark and many 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 20.32%, the fund’s volatility is among the lowest in the category and is far below the benchmark (23.14%). Moreover, the Sharpe Ratio of the fund at 0.30 is currently among the highest in the category and much ahead of its benchmark.

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 20.4% 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 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.

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

Holding in (%) as of August 31, 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 realise the full potential of the stocks it has bought in the portfolio. Among domestic equities, the fund held top exposure in HDFC Ltd. (8.2%), Bajaj Holdings & Investment (7.7%), ITC (7.5%), ICICI Bank (6.2%), Axis Bank (5.1%), HCL Technologies (5.1%), and Power Grid Corporation of India (5.1%), as of August 31, 2022.

Parag Parikh Flexi Cap Fund also holds exposure to foreign companies which offers an element of diversification benefit to the investor’s overall portfolio. Alphabet Inc. is currently the fund’s largest foreign exposure (about 6% of its corpus), followed by Microsoft Corp. (5.8%), Amazon (5.1%), Facebook (2.9%), and Suzuki Motor Corporation (0.6%). Notably, the fund’s exposure to overseas equity has come down in the past few months from around 33% to around 20% at present.

In the last one year, Parag Parikh Flexi Cap Fund benefitted the most from its holdings in ITC, Bajaj Holdings & Investment, and ICICI Bank. However, its exposure in HCL Technologies, Oracle Financial Services Software, Multi Commodity Exchange of India, and Zydus Lifesciences, among others, eroded some of its gains.

In terms of sector, Banking and Finance collectively account for 33.3% of its assets, followed by Power, Consumption, Auto & Auto Ancillaries, Infotech, Mining, and Pharma. In addition, the fund had exposure of about 20.4% in offshore equities.

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. Moreover, the fund has stood among the category toppers in the current bull phase. The high alpha generated by the fund over the past few years has proved to be exceedingly rewarding for its long-term investors.

Parag Parikh Flexi Cap Fund’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. Parag Parikh Flexi Cap Fund is well equipped to manage market volatility, as it has done successfully in the past.

The fund is suitable for investors looking for a cautiously managed Flexi-cap fund with flexibility to offer offshore diversification and is willing to stay invested with a longer time horizon of at least 5 to 7 years.

Update on overseas investments of Parag Parikh Flexi Cap Fund

PPFAS Mutual Fund has reopened Parag Parikh Flexi Cap Fund for fresh transactions with effect from March 15, 2022. The fund had temporarily suspended fresh investments in February 2022 amid SEBI’s directive on stopping fresh investments abroad.

Notably, RBI has not announced any plans to increase the overseas investment limit. Accordingly, the fresh net inflows in the scheme have been invested primarily in domestic equities. Therefore, the weightage of foreign stocks or offshore equities in Parag Parikh Flexi Cap Fund has come down in the last few months. The fund house has mentioned that it will consider rebalancing the portfolio as per the then prevailing situation and valuations as and when the overseas investment limits are increased.

This article first appeared on PersonalFN here