Parag Parikh Long Term Equity Fund is a multi cap fund from PPFAS that invests primarily in Indian equities along with international markets (US mostly).
What
makes Parag Parikh Long Term Equity fund stand apart?
- It is the only multi cap mutual fund that takes exposure to international markets along with Indian markets.
- Comparatively higher cash calls.
- Out performance during a bear market and under performance during a bull market.
- Limited number of stocks, focused approach.
What
are the new SEBI rules regarding multi cap funds?
Earlier multi cap schemes needed a minimum 65% investment
into equities with no restriction towards any cap.
Additional reading: Click Here to read our complete report of the new SEBI rules on multi cap mutual funds
Now multi
cap funds would need a minimum investment of 75% into equity (as opposed to
earlier rule of 65%) which would be divided in the following manner:
- Minimum 25% of investment into equity and equity related instruments of large cap companies (as opposed to n0 such restriction earlier).
- Minimum 25% of investment into equity and equity related instruments of mid cap companies (as opposed to no such restriction earlier).
- Minimum 25% of investment into equity and equity related instruments of small cap companies (as opposed to no such restriction earlier).
These
proposals will come into effect within the first week of February 2021.
Parag Parikh Long Term Equity Fund strategy
Parag
Parikh multi cap fund as mentioned above has a focused approach despite being a
multi cap fund.
Additional reading: Click Here to read our complete review of Parag Parikh Long term equity fund
It
comparatively has higher cash holdings and is the only multi cap fund at the
moment to have foreign holdings along with domestic companies.
The fund
has a tendency to under perform in a bull phase of the market due to not
succumbing to momentum picks and out perform its peers in a bear phase due to
higher cash holdings along with a limited number of stocks.
With
regards to its foreign holdings, historically it has stuck with US bluechip
companies and that too within the IT space.
Suzuki
Motor Corporation is the only exception to this, it is picked despite it being
listed on the Indian stock exchange too due to its rather attractive valuation abroad.
How
will the new rules for multi cap funds affect Parag Parikh Long Term Equity?
The fund cannot function in the same manner it has done so
far if the new rules apply.
We say if because the regulator is studying suggestions from
the industry.
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| Source: Business Line |
In case there are no changes to the initial proposals and
the fund has to adhere to the proposed guidelines then it will have to carve a
new strategy going ahead for the following reasons:
- Parag parikh long term equity fund usually takes negligible exposure to small cap stocks, with the new proposal it would need to raise it up to 25%.
- With mid cap stocks too, it is a similar story although the exposure is still higher as compared to small cap stocks, with the new proposal again though it would need to increase the exposure to mid cap stocks up to 25%.
- With 75% exposure to equity a minimum rule now, the fund would have to either cut down on foreign allocation which would raise domestic holdings and vice versa.
This would mean the fund should not be expected to perform in the same manner as it was earlier and would also serve as a deterrent to investors venturing into in the fund for international exposure.
This Parag parikh fund has historically taken higher cash
calls as compared to other multi cap funds but with the new proposals that
would have to come down.
This is because a minimum of 75% has to be invested in
equity at all times.
There is no guarantee of future returns be for Parag Parikh
Long Term Equity fund or for that matter any other mutual fund.
Having said that though, getting a sense of the functioning
of the fund house, fund manager and fund gives you a better understanding of
risks and expectations.
Therefore, in case the new proposals are implemented, it
would be sensible to avoid looking at the functioning of the fund with old lens
and also reviewing expectations both in terms of returns and strategy of the
fund.
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| PPFAS CIO |
What options
does Parag Parikh Long Term Equity fund have now?
If Parag Parikh long term equity fund decides to stick with the
same label of a ‘Multi Cap’ fund then it will have no option than to adopt to the
new proposals.
In case it wants to stick to its current portfolio strategy
then the most suitable option would be to recategorize the fund in the
‘Focused’ category rather than the new multi cap category.
Here’s explaining why:
A Focused mutual fund by regulation can only invest in up to
30 stocks maximum.
As can be seen by the image at the beginning of this write up, Parag Parikh Long Term Equity fund has historically mostly invested around 25-30 stocks.
A Focused mutual fund has no restrictions with regards to
large, mid or small cap funds.
A Focused mutual fund has no restrictions or regulations
regarding foreign exposure, only thing being the fund needs to have a minimum
of 65% invested in domestic companies.
Parag Parikh long term equity fund with its current
investing style would not need to change much to adapt to this.
Similar would be the case with its high cash holdings.
Whatever be the decisions of the fund, be it accept the new
multi cap proposals and adapt accordingly or reposition itself in to another
category what is clear is that understanding why a fund performs well is as
important as knowing why it does not.
It has been historically noticed that most retail investors
go with immediate previous returns (not past returns) without taking into
account factors like fund manager, fund category, fund style, etc. and yet
expect their chosen fund to perform in a manner either similar to previous
returns or in some cases even better.
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