Parag
Parikh Long Term Equity fund has received the necessary approval from SEBI
(Securities and Exchange Board of India) with regards to recategorizing its
name as well as category.
The fund
was earlier named as Parak Parikh Long Term Equity Fund but with effect from
January 13, 2021 would be known as Parag Parikh Flexi Cap Fund.
Parag
Parikh Long Term fund was earlier a multicap mutual fund but henceforth would
be recategorized as a flexicap mutual fund.
|
|
Existing |
Revised |
|
Scheme Name |
Parag Parikh Long Term Equity Fund |
Parag Parikh Flexi Cap Fund |
|
Scheme Category |
Multicap Fund |
Flexi Cap Fund |
Segregated Portfolio
Parag
Parikh mutual fund has also decided to include provisions for a segregated
portfolio in the SID (Scheme Information Document) of debt and money market
instruments.
What is segregated portfolio in mutual fund
schemes?
A segregated portfolio in a mutual fund scheme helps in:
- Reducing redemption pressure
- Reducing a big fall in nav of schemes
- Protecting good quality papers
How a segregated portfolio helps?
Even though
all AMC’s and mutual fund schemes have their own stringent internal evaluation
systems in place, the fear of credit downgrade in portfolio companies is very
much real.
The instrument that is downgraded becomes illiquid making it
difficult for the fund manager to sell off the downgraded instrument.
If the downgraded instrument is not segregated, it affects
the returns of the other portion of the portfolio thereby negatively affecting
even the more liquid and better performing assets.
The
Securities and Exchange Board of India (SEBI) had on 11/09/2020 issued a
circular bringing about changes to fundamental characteristics of Multi Cap
mutual funds.
Existing rules for Multi Cap mutual funds
Presently multi cap mutual funds need to invest a minimum of 65% of total assets into equity.
This 65% is
needed for any equity fund and not just multi cap mutual funds to qualify as
equity funds which has a favourable tax proposition.
This 65% is
only minimum which can even go up to 100% in case the fund manager so desires.
Whatever
the allocation between 65% to 100%, there is no restriction with relation to
large cap, mid cap or small cap stocks.
Revised rules for Multi cap
mutual funds
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.
Additional reading: Click Here to read our complete report on everything that you should know about a Mutual fund NAV.
Parag Parikh Long Term Equity Fund strategy
Parag
Parikh long term equity has a focused approach despite being
a multi cap 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 underperform in a bull phase of the market due to not
succumbing to momentum picks and outperform 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.
Possible explanation for this new proposal
The
regulator believes that most multi cap mutual fund schemes were basically large
cap schemes in terms of their asset allocation disguised as multi cap funds.
These multi
cap funds were therefore not true to their label.
There is an
element of truth but existence of truth does not imply a lie part as well, the
universe is not as binary as we believe so.
Sure, most
multi cap funds presently are more large cap biased but we also need to
understand the reasons behind the same rather than simply drawing conclusions
based on current allocations
The Indian
stock market has been more or less volatile during the last few years and large
cap stocks provide more stability than mid and small cap stocks.
Large cap
stocks do not face liquidity issues as much as mid and small cap stocks.
The idea
behind a multi cap fund is to allow the fund manager freedom to move around
various sectors based on his understanding of the market.
A multi cap
fund at the end of the day is still an actively managed fund that needs
constant overlooking to make sure the overall portfolio is balanced.
Investors
looked at multi cap funds as a safe and uncomplicated haven since they did not
have the burden or compulsion of being confined to sectors like say in the case
of mid cap, small cap, large & mid cap, thematic mutual funds, etc.
A multi cap
fund was one fund where the fund manager would deviate across various sectors,
caps and themes based on market movements.
Interesting
facts about Parag Parikh long term fund
Exit Load : Unlike other equity mutual funds, Parag
Parikh Long Term Equity Fund has a 2% exit load if redeemed within 365 days. This
has been put into place to deter investors with a short term horizon in equity
investing.
No Dividend Option : The fund does not offer dividend
option so that investors can avail the true benefits of compounding.
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