Now, the fund house is gearing up to launch a large-cap fund. It has filed a draft scheme information document (SID) with the Securities and Exchange Board of India (Sebi) for the Parag Parikh Large Cap Fund, sparking considerable interest among investors.
There are questions about whether the scheme will differ significantly from other large-cap funds, or if it will overlap with the fund house’s own flexi-cap offering.
The large-cap fund
In line with Sebi regulations, the Parag Parikh Large Cap Fund will invest at least 80% of its corpus in large-cap Indian stocks (top 100 in terms of full market capitalization). The remainder will be allocated to Indian company stocks beyond the top 100, foreign company stocks, debt and money market instruments, real estate investment trusts, and infrastructure investment trusts. The scheme will be benchmarked to the Nifty 100 Total Return Index.
This will be the third equity scheme from the fund house after the Parag Parikh Flexi Cap Fund and the Parag Parikh ELSS Tax Saver Fund.
The fund house is best known for its flagship flexi-cap fund—the largest scheme in the category—which is required to invest at least 65% of its corpus in equities across large-, mid-, and small-cap stocks.
As of 31 October, the Parag Parikh Flexi Cap Fund held around 66% of its assets in Indian equities and 11.50% in foreign equities. The scheme had assets worth close to ₹1.26 trillion under management (AUM). Its next largest scheme, Parag Parikh ELSS Tax Saver Fund, was a distant second with an AUM of only ₹5,791 crore.
Competitive category
PPFAS would launch a new scheme only if it can provide simplification or differentiation to the existing category/scheme, or if it wants to invest its own money in it, or if there are any regulatory changes compelling it to do so, Neil Parikh, chairman and CEO, PPFAS, said in response to a discussion on X on 10 November.
Questions emailed to PPFAS AMC remained unanswered until the time of publishing. The fund house will take up all questions received on the proposed launch at its annual unitholders’ meeting on 22 November.
With all large-cap funds in the industry confined to the same universe of the top 100 stocks, questions remain on whether the new scheme will be able to offer any meaningful differentiation.
Dhirendra Kumar, founder and CEO, investment research firm Value Research, feels this is possible but only up to a point. “By rule, a large-cap fund has to keep most of its money in the top 100 companies. That list is already very crowded and well-researched. Where PPFAS can still differ is in how they run the portfolio: genuinely active rather than hugging the index, a tighter list of 25-35 high-conviction large caps rather than 60-80 names, strict valuation discipline and with their cash allocation.”
Aarati Krishnan, head of advisory, Sebi research analyst Primeinvestor.in, believes that this is possible because, as a valuation-conscious AMC, PPFAS often picks stocks that are perceived as boring or unpopular by others, and so their investing style can work particularly well in the large-cap space today. “There are value-buying opportunities in the large-cap space in sectors such as financial services, IT, and pharma.”
She offered one other reason. “Large-cap stocks in India are reliant on FPI flows for momentum, and we have seen relentless FPI selling in recent years. But the next bull phase for Indian markets hinges on FPIs correcting their India underweight positions. Therefore, this seems to be a good time to launch a large-cap fund.”
That said, one may still have concerns over portfolio overlaps (the same set of large-cap stocks) between PPFAS’s flexi-cap fund versus its proposed large-cap fund.
Limited opportunities
PPFAS MF has not shied away from maintaining higher levels of cash in its flexi-cap fund when it hasn’t found adequate investment opportunities. As of 31 October, the scheme held just under 22% of its net assets in cash, debt, and money market instruments. With the large-cap fund operating within an even smaller universe of stocks, this raises the question of whether investment opportunities could be further constrained.
According to Krishnan, since the launch is timed to a phase where sectors with significant weights in the large-cap space are out of favour, the large-cap fund is unlikely to face a dearth of opportunities.
But looking beyond that, Kumar feels the problem is real, and it’s mainly regulatory. “In the flexi-cap fund, PPFAS can move across market caps, go abroad, and maintain a larger cash/debt cushion when valuations are not comfortable. In a large-cap fund, at least 80% must be invested in the top 100 stocks, and only 20% can be cash or debt. So yes, given their strict valuation approach, they will hit the ‘nothing worth buying at these prices’ wall faster in a bull market.”
That said, one will have to wait until PPFAS’s upcoming annual unitholders’ meeting for greater clarity.
