I invest in Canara Robeco Bluechip (Rs 1,000), PGIM India Midcap (Rs 1,000), Axis Smallcap (Rs 1,000), Tata Digital India (Rs 1,000). I was wondering if I need a flexi-cap fund in my portfolio. And more specifically, PPFAS Flexicap. What are your views on my entire portfolio and the flexi-cap fund suggestion?
I have given my views based on four questions that you would like answered.
Q1: What are your views on my entire portfolio?
Broadly, you have a good selection of funds in your portfolio. Also, it’s good to see that you have invested in a mix of large, mid and small cap funds. However, since the contribution in them is the same, it appears that the investments have largely been made arbitrarily, rather than doing it via the financial planning and asset allocation route.
Financial planning helps in identifying the asset allocation mix that is apt for you based on your investment objective, risk appetite among others, which helps in optimizing returns over the long-term.
For example, if you are a high-risk taking investor, you can invest 80% of assets in equities and 20% in fixed income. Within equity you can diversify your portfolio across large, mid and small cap funds and can have some exposure in flexi-cap funds too. So, the allocation across market segments would be:
- Large caps = 50%
- Mid caps = 20%
- Small caps = 10%
Q2: Do I need a flexi-cap fund in my portfolio?
Let me start off my explaining a crucial difference between multi-cap and flexi-cap. Both are diversified equity funds with a significant difference – their exposure to various market caps.
Multi-cap funds have a mandatory allocation of 25% each to the three different market capitalizations - small, mid and large cap. So, a fund could have a 50% allocation to large-cap stocks, but will ensure that the allocation to mid and small caps are 25% each. Or, it could be a 40% allocation to mid caps, a 35% allocation to large caps and a 25% allocation to small caps.
Flexi-cap funds have the leeway to dynamically move across the market-cap categories based on the fund manager’s strategy and outlook for each. There is no restriction on the level of exposure towards the three segments. It is a go-anywhere strategy where the fund manager will invest depending on where he sees optimal value. There could be periods when the allocation to any specific market cap is almost negligent.
As of December 2021, the flexi-cap category maintained an average exposure of 76% in large caps, while the multi-cap category had an average exposure of 54% towards large caps.
It could be perceived that multi-cap funds are relatively riskier as compared to flexi-cap funds since a minimum of 50% of the portfolio is allocated to mid and small caps. Having said that, the fund manager of a flexi-cap fund may decide to move the bulks of his assets to the mid and small cap segment if he finds value there. But, if the segment is getting hammered in the market, he may choose to find refuge in large caps, so the downside could be protected to some extent. But if there is a sudden rally, he may miss out on the gains due to his strategic allocation.
Q3: What is your view on PPFAS?
With respect to specific flexi-cap funds, PPFAS Flexicap Fund is a good investment proposition.
The fund was launched in 2013 and its performance has been impressive; 14.43% (2019), 32.29% (2020), 45.51% (2021). This has not gone unnoticed and it was one of the funds that received the highest number of inflows in 2021 in the flexi-cap category.
Besides investing in Indian stocks, the fund has the flexibility to invest up to 35% of its assets in global stocks thus providing an additional level of diversification benefit. It's top 5 equity holdings are Bajaj Holdings & Investment, Alphabet, ITC, Microsoft and Amazon.
That said, given SEBI’s recent ruling, the fund has temporarily suspended accepting lumpsum as well as fresh SIP subscriptions effective February 2, 2022. This is done to avoid breach of industry-wide overseas limits as allowed by RBI.
In the current scenario, you can either wait till this temporary suspension on investments is removed from the fund; or you can select another flexi-cap fund.
Besides performance, it is also important to look at the fund manager’s style; how diversified the portfolio and how concentrated the bets. Some funds may be managed with a growth biased approach, while some may have a value style or growth at a reasonable price (GARP). For instance, Kotak Flexi cap has been consistently plying a growth centric approach, on the other hand HDFC Flexi Cap runs with a value bent. Both these funds are highly rated by our analysts but both will perform very differently in similar market conditions. While the flexi-cap fund category has a very fluid investment mandate, many funds from the category are run with a defined investment approach. So it is not surprising to see that the category average in large-cap stocks hovers over 65%.
A few flexi-cap funds also have global exposure as a diversification feature, such as Parag Parikh Flexi Cap Fund. Not all have this.
Our analysts' views on these flexi-cap funds:
Q4. What is your view on TATA Digital India Fund?
This fund is an IT sector fund that invests mostly in technology stocks. Such funds are cyclical in nature. They tend to do well when the underlying sector performs. However, when the sector goes through a rough patch, the manager doesn’t have the liberty to invest in other sectors. Hence, it's a high-risk, high-return investment proposition. Sector or thematic funds must only be a small part of the portfolio. And then work best when you have a clear entry and exit strategy.
Such funds are usually for investors who understand the dynamics of the sector, or have adequate advice available on the sector, to time their entry and exit from it. If you don’t have access to such resources, it's better to stick to regular diversified equity funds. You can view our research reports here.
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