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.

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
March 28, 2023
(Source: ACE MF) 

Launched in May 2013, Parag Parikh Flexi Cap Fund is one of the largest schemes in the Flexi Cap Fund category having an AUM of Rs 29,953 crore as of February 28, 2023. The fund has a flexible investment mandate that allows it 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. 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 ability to pick high-potential quality stocks has helped it generate superior risk-adjusted returns for its investors. Moreover, the fund also offers exposure to overseas equities to provide geographical diversification. An investment of Rs 10,000 in Parag Parikh Flexi Cap Fund five years back would have more than doubled to Rs 22,791, at a CAGR of 17.9%. A similar investment in the benchmark Nifty 500 – TRI would have grown to Rs 16,860 at a CAGR of 11%. Following a cautious investment strategy, Parag Parikh Flexi Cap Fund limits the downside well during bear market phases and has also done well during bull markets. This strategy has rewarded its long-term investors over the complete market cycle, thereby generating substantial alpha over the broader market index.

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	1,045	1.51	21.56	47.63	17.74	20.77	22.19	0.45
HDFC Flexi Cap Fund	31,673	10.06	18.65	35.18	13.86	16.06	20.74	0.34
PGIM India Flexi Cap Fund	5,199	-3.20	11.63	34.77	15.55	16.50	19.96	0.35
Parag Parikh Flexi Cap Fund	29,953	-0.02	15.06	33.68	17.90	17.69	16.87	0.40
Franklin India Flexi Cap Fund	9,989	2.10	12.22	32.54	11.76	13.11	20.23	0.31
Edelweiss Flexi Cap Fund	1,056	0.62	11.57	28.31	11.69	15.09	18.44	0.29
Union Flexi Cap Fund	1,337	-1.33	10.30	27.91	12.56	13.47	18.17	0.30
JM Flexicap Fund	256	5.02	12.82	26.88	13.24	16.57	19.36	0.27
HSBC Flexi Cap Fund	3,097	2.23	10.39	26.85	9.02	11.87	17.82	0.28
SBI Flexicap Fund	15,603	-3.32	8.88	26.26	10.50	13.56	18.34	0.26
NIFTY 500 – TRI		-2.13	9.30	27.87	11.01	13.54	19.16	0.28

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 March 28, 2023
(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 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.

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.

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

Holding in (%) as of February 28, 2023
(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. (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.

This article first appeared on PersonalFN here