- Date : 31/05/2023
- Read: 3 mins
Parag Parikh Flexi Cap Fund, one of India's largest equity schemes, faces challenges amid regulatory restrictions and its own size. Can it repeat its historic successes?
- True-to-label approach and allocation to US equities contributed to the fund's success.
- Low portfolio turnover ratio showcases a disciplined buy-and-hold strategy.
- Challenges include regulatory restrictions on overseas investments and managing a large-sized fund.
- Investment advisors express confidence in the fund's management and long-term prospects.
Parag Parikh Flexi Cap Fund (PPFCP) has achieved remarkable success in the Indian equity market, becoming one of the largest schemes with assets under management (AUM) exceeding Rs. 33,500 crore. The fund's journey started a decade ago with an AUM of around Rs. 150 crore, and it has experienced exponential growth since then.
PPFCP's success can be attributed to its adherence to a true-to-label approach and allocation to US equities, which has yielded impressive returns over a five-year period. However, experts now highlight the challenges that the scheme may face as it continues to grow in size and faces restrictions on overseas investments.
Also Read: Flexi-cap vs. Multi-cap funds. Where should you invest?
How did PPFCP succeed?
One key factor contributing to PPFCP's success is its management style, influenced by the value investing approach of Warren Buffett and Charlie Munger. The fund focuses on buying quality companies at a reasonable price, as well as undervalued companies with low PE or price-to-sales ratios. This approach, combined with Parag Parikh's emphasis on stock research, quality, value investing, and behavioural finance, has been instrumental in the fund's success.
PPFCP has also been early in taking exposure to US equities, which has been a unique proposition and a significant driver of its performance. The fund's portfolio turnover ratio is considerably low compared to other equity schemes, as it follows a buy-and-hold strategy. Notably, the fund has held stocks like Axis Bank, ICRA, ICICI Bank, and Ipca Laboratories since its inception, demonstrating its conviction and discipline.
Also Read: New Mutual Fund Rules Introduced With Effect From 1 April 2023.
What are the challenges facing PPFCP?
However, there are emerging challenges for the scheme. The correction in the US markets since early 2022, coupled with regulatory restrictions on further investments in foreign stocks, has affected the fund's performance and its ability to deploy funds in the US market. The overseas exposure of the fund has decreased, and additional funds are being allocated to domestic stocks.
The fund's large size also poses challenges. With an AUM of Rs. 33,000 crore, deploying a significant amount of money in US stocks becomes difficult due to allocation restrictions. Additionally, the fund's focus on value investing can lead to underperformance in a market where growth stocks dominate. The fund's large-cap bias and potential impact on short-term returns due to cash holdings are also considerations.
Despite these challenges, investment advisors remain positive about the fund's management and its value system. They trust the consistency in the fund's philosophy and framework, which has been the key to its success. The growing size of the Indian market and opportunities in the mid-cap and small-cap spaces also provide optimism for the fund's future performance.
In conclusion, while Parag Parikh Flexi Cap Fund has enjoyed historic successes, it faces challenges as it continues to grow in size and navigates restrictions on overseas investments. The fund's management style, adherence to its investment approach, and disciplined portfolio mix have been the pillars of its success. Overcoming the challenges and sustaining its outperformance will require careful management and adaptability to evolving market conditions. Nevertheless, investment advisors express confidence in the fund's management and believe it can continue to deliver consistent results in the long run.
