Navigating the Flexi Cap Landscape: HDFC Flexi Cap Fund vs. Parag Parikh Flexi Cap Fund
April 22, 2024 Mutual Fund
Flexi Cap funds have become a magnet for investors in the Indian market due to their unique blend of diversification, growth potential, and adaptability. Unlike Large, Mid, or Small Cap funds, Flexi Caps invest across the entire market capitalisation spectrum. This allows them to tap into growth opportunities present in all company sizes, mitigating risk by not being overly reliant on a single segment.
As per SEBI mandate, Flexi Cap Mutual Funds are equity-oriented mutual funds that invest a minimum of 65% of their assets in equity and equity-oriented instruments of companies across the market cap range without any upper or lower limit.
Flexi Cap funds allow fund managers to adjust the portfolio allocation dynamically based on their outlook and market conditions. These funds are not restricted by pre-defined allocation limits like multi-cap funds with a minimum 25% exposure in each segment. Investors benefit from diversification across different risk-return profiles within equities.
Flexi Cap funds can increase exposure to high-growth Mid and Small Caps during bull markets to capitalise on their amplified potential. Conversely, in bear markets, they can shift towards Large Caps for relative stability. This adaptability helps navigate market fluctuations and potentially enhance returns.
[Read: 4 Best Flexi Cap Funds for 2024 – Top Performing Flexi Cap Mutual Funds in India]
While India is headed towards the general elections, experts expect a pre-election rally, as seen during the past elections. Additionally, expectations of a rate cut by the RBI in 2024, macro stability, strong balance sheets of the corporate sector, and robust participation by domestic investors are among the other positive factors that can give a boost to the rally.
It is crucial to exercise prudence in light of the rising valuations and global uncertainty, especially with regard to the mid-cap and small-cap divisions. Flexi-cap funds can be your ally if you are worried about market volatility due to election jitters and are unclear on which market capitalisation to bet on.
Flexi Cap Funds are well-placed to align their portfolio with the shifting dynamics of the market. Thus, in 2024, Flexi Cap Funds may play a significant role and become an integral part of the investors’ equity portfolios.
Flexi Cap funds witnessed a promising performance in the recent period. According to the historical data, in 2023, actively managed Flexi Cap schemes delivered an average return of around 24%, exceeding the benchmark Nifty 500 TRI and S&P BSE 500 TRI. This strong performance can be attributed to positive market sentiment and a focus on high-growth potential companies across different market capitalisations.
So far in 2024, the performance has been more subdued. This is a more moderate performance compared to 2023, but it is important to consider that market conditions can fluctuate throughout the year. Flexi Cap funds offer the potential for attractive returns, but they also carry inherent volatility due to their exposure to mid and small cap stocks.
When navigating this exciting yet volatile landscape, choosing the right fund becomes paramount. Two of the most prominent contenders in this space are HDFC Flexi Cap Fund and Parag Parikh Flexi Cap Fund. This comprehensive analysis delves into a head-to-head comparison of these funds, equipping you with the knowledge to make an informed investment decision.
HDFC Flexi Cap Fund, formerly known as HDFC Equity Fund, is a popular option for investors seeking diversification and growth potential in the Indian stock market. It is an open-ended equity scheme that belongs to HDFC Mutual Fund. It is a well-established Flexicap mutual fund scheme launched in January 1995 and currently has an AUM of Rs 50,839.90 crores (as of Mar 31, 2024).
The fund follows a value-oriented investment strategy and is averse to investing in momentum-driven bets, even if it leads to short-term underperformance. HDFC Flexi Cap Fund is benchmarked against Nifty 50 – TRI as a primary index and Nifty 500 – TRI as a secondary index.
# – Parag Parikh Flexi Cap Fund
Parag Parikh Flexi Cap Fund is an open-ended equity scheme and belongs to Parag Parikh Mutual Fund. It is a well-established mid cap mutual fund scheme launched in May 2013 and currently has an AUM of Rs 60,559.43 crores (as of Mar 31, 2024).
The fund’s primary goal is to generate long-term capital growth from an actively managed portfolio primarily of equity and equity-related securities. The fund manager, Rajeev Thakkar, is known for his patient investing style and focus on long-term wealth creation.
Parag Parikh Flexi Cap Fund is benchmarked against Nifty 50 – TRI as a primary index and Nifty 500- TRI as a secondary index.
Investment Style and Philosophy:
– HDFC Flexi Cap Fund has grown in size over the years. The fund manager, Roshi Jain and Mr Dhruv Mucchal (for overseas) adopts a combination of bottom-up stock selection and top-down considerations, focusing on identifying undervalued companies with robust business models.
The fund manager prioritises companies with strong fundamentals and with potential for long-term capital appreciation. The allocation may tilt towards Mid and Small Caps to capture their higher growth prospects, but the fund doesn’t shy away from Large Caps if they present attractive opportunities.
– Parag Parikh Flexi Cap Fund is a value-oriented scheme in the Flexi Cap Fund category. It aims to invest in quality stocks across market caps and sectors available at reasonable or attractive valuations. The fund holds a sizeable portfolio of over 49 stocks spread across market cap sectors and picked by utilising a bottom-up investment strategy.
The superior stock-picking ability has driven the performance of the fund. Parag Parikh Flexi Cap Fund has delivered superior returns over the long run and has generated substantial alpha over its benchmark Nifty 500 – TRI, which has also outpaced most of its category peers.
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Performance Comparison: Rolling Returns
Scheme Name Absolute (%) CAGR (%) 1 year 3 Years 5 Years 7 Years 10 Years HDFC Flexi Cap Fund (G)-Direct Plan 28.47 22.15 12.64 14.04 17.44 Parag Parikh Flexi Cap Fund(G)-Direct Plan 27.79 25.41 17.54 18.56 20.19 Flexi Cap – Category Average 37.97 18.91 16.56 14.55 16.15 Benchmark – Nifty 500 TRI 21.85 19.22 12.45 13.87 12.86 Data as of April 18, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)Looking at historical data, Both funds have delivered strong absolute returns across most timeframes. However, underperformed the category average in 2023.
HDFC Flexi Cap Fund boasts a commendable track record, consistently delivering competitive returns to investors. It has outperformed the benchmark Nifty 500 TRI in recent years (3-5 years). However, its performance over a longer period (5-10 years or more) might be slightly eclipsed by some of its peers.
Considering the long-term performance, Parag Parikh Flexi Cap Fund has outperformed HDFC Flexi Cap Fund across most timeframes. However, do note that Parag Parikh Fund carries a slightly higher allocation to mid and small cap stocks as compared to HDFC's fund.
HDFC Flexi Cap's higher absolute return might indicate a more aggressive investment strategy, potentially exposing it to higher volatility. Parag Parikh Flexi Cap's superior CAGR suggests their value investing approach has yielded consistent and compounded growth over the long term.
While both the scheme's historical performance is encouraging, it's crucial to remember that past performance doesn't guarantee future results. Conduct thorough research and consider your risk tolerance and investment goals before making investment decisions.
Portfolio Composition: Asset Allocation of Schemes
Both HDFC Flexi Cap Fund and Parag Parikh Flexi Cap Fund are popular amongst investors in the mid cap segment, but their asset allocation strategies differ slightly.
Scheme Name Mid Cap % Large Cap % Small Cap % Others % HDFC Flexi Cap Fund 4.39 76.57 6.44 12.58 Parag Parikh Flexi Cap Fund 7.07 56.94 6.96 20.01 Data as of March 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)Both funds are primarily invested in large-cap companies. A surprising element is the significant weightage (over 75%) towards large caps in HDFC Flexi Cap Fund. This positioning suggests a more conservative approach compared to the typical perception of Flexi Cap funds, focusing heavily on mid and small caps.
The fund allocates a relatively small portion (around 10%) to mid and small caps. This reduced exposure might limit the fund's potential for high growth but could also translate to lower volatility compared to funds with a more aggressive mid and small cap tilt.
As you can see, Parag Parikh Flexi Cap Fund exhibits a more balanced distribution across market capitalisations. Large caps still form the majority (around 57%) of the portfolio, but the fund allocates a higher percentage (around 7% each) to both mid and small caps compared to HDFC Flexi Cap.
Overall, HDFC Flexi Cap Fund's strategy might prioritise capital preservation and focus on Large Caps for their established track record and potentially lower volatility. Whereas, Parag Parikh Flexi Cap Fund's approach reflects a more traditional Flexi Cap philosophy, aiming to balance growth potential with stability.
Market Volatility: Risk Profile of Schemes
The equity market experiences constant ups and downs, and Flexi Cap funds are particularly susceptible to these fluctuations.
Risk Ratio (3 years) HDFC Flexi Cap Fund Parag Parikh Flexi Cap Fund Category Average – Flexi Cap Funds Standard Deviation 14.47 12.60 13.57 Sharpe Ratio 0.45 0.41 0.41 Sortino Ratio 1.00 0.79 0.87 Data as of March 15, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)HDFC Flexi Cap Fund appears to be riskier with a higher Standard Deviation (14.47) compared to Parag Parikh Flexi Cap Fund (12.60). This indicates that the returns of HDFC Flexi Cap Fund have fluctuated more significantly over the past 3 years. The Sharpe Ratio for both funds falls below 1, which suggests that the returns haven't consistently outperformed the risk-free rate over the past 3 years.
HDFC Flexi Cap Fund's higher Sortino Ratio indicates that HDFC Flexi Cap has potentially generated a better return on the downside risk (negative returns) compared to Parag Parikh Flexi Cap Fund. This could be because the fund's Large Cap tilt might have provided some buffer during market downturns.
While HDFC Flexi Cap Fund might have exhibited slightly better risk-adjusted returns based on the Sortino Ratio, do note it carries a higher Standard Deviation, which means higher volatility as compared to Parag Parikh Flexi Cap Fund. It is crucial for you to consider other factors beyond these ratios when evaluating a fund's risk profile.
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Top Holdings of the Flexi Cap Schemes:
HDFC Flexi Cap Fund Parag Parikh Flexi Cap Fund Company % Assets Company % Assets ICICI Bank Ltd. 9.46 HDFC Bank Ltd. 8.06 HDFC Bank Ltd. 9.31 Bajaj Holdings & Investment Ltd. 6.52 Axis Bank Ltd. 6.49 Power Grid Corporation Of India Ltd. 6.17 Cipla Ltd. 5.59 Maruti Suzuki India Ltd. 5.75 Hindustan Aeronautics Ltd. 5.37 ICICI Bank Ltd. 5.19 State Bank Of India 4.88 ITC Ltd. 5.17 Bharti Airtel Ltd. 4.35 Coal India Ltd. 4.97 HCL Technologies Ltd. 4.20 HCL Technologies Ltd. 4.77 SBI Life Insurance Company Ltd. 4.13 Microsoft Corp 4.25 Apollo Hospitals Enterprise Ltd. 4.13 Axis Bank Ltd. 4.09 Data as of March 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)While past holdings don't necessarily dictate future positioning, analysing the top holdings of these Flexi Cap funds offers valuable insights into their investment philosophies and sector preferences.
A striking feature is the significant weightage towards financials in HDFC Flexi Cap Fund. ICICI Bank and HDFC Bank occupy the top two spots, together accounting for nearly 19% of the fund's assets. This suggests a tilt towards Large Cap financials, potentially prioritising stability over high-growth potential.
While the fund has a Flexi Cap classification, the top holdings reveal a focus on Large Caps. Companies like Maruti Suzuki and HCL Technologies, while established players, might not represent the typical high-growth potential often associated with smaller companies.
On the other hand, Parag Parikh Flexi Cap Fund exhibits a more diversified sector allocation compared to HDFC Flexi Cap. While financials like ICICI Bank and Power Grid Corporation are present, they hold a lower weightage, and the fund includes companies from sectors like Consumer Staples (ITC), Pharma (Cipla), and Technology (HCL Technologies).
Companies like Bajaj Holdings & Investment and Bharti Airtel suggest Parag Parikh Flexi Cap's willingness to incorporate companies with promising growth potential alongside established names.
Expense Ratio of the Schemes
When comparing mid cap funds, the Expense Ratio, which represents the annual fee charged, plays a crucial role in determining your returns. Here's a quick breakdown of HDFC Flexi Cap Fund vs Parag Parikh Flexi Cap Fund:
Scheme Name Direct Plan Expense Ratio Regular Plan Expense Ratio HDFC Flexi Cap Fund 0.81% 1.51% Parag Parikh Flexi Cap Fund 0.57% 1.32% Data as of March 31, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research)HDFC Flexi Cap Fund offers a higher expense ratio in the direct and regular plan, indicating lower net returns for investors compared to Parag Parikh Flexi Cap Fund, which offers a cost advantage to investors.
Remember, a lower expense ratio translates to potentially higher returns over time. Over the long term, even a seemingly small difference in Expense Ratio can accumulate and significantly impact your returns.
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Suitability of Investors to the Schemes:
HDFC Flexi Cap Fund is suitable for investors with a moderate risk appetite and a long-term investment horizon (ideally 5 years or more). It can be a good choice for those seeking a balanced approach to capturing growth across market capitalisations.
Parag Parikh Flexi Cap Fund caters to investors comfortable with a higher degree of risk in exchange for the potential for superior returns. It aligns well with investors seeking a value investing strategy focused on long-term wealth creation.
Both schemes are suitable for investors willing to accept moderate to high volatility in exchange for higher potential returns. And for the ones with a long-term investment horizon of at least 5-7 years or more.
To summarise…
India’s economic growth trajectory presents a compelling backdrop for Flexi Cap funds. As the economy expands, companies across market capitalizations are poised to benefit. Large caps offer stability and established track records, while mid and small caps harbour the potential for high growth.
Although the Indian market landscape offers a compelling opportunity for growth-oriented investors, navigating this dynamic flexi cap space requires careful fund selection. Both HDFC Flexi Cap Fund and Parag Parikh Flexi Cap Fund are strong contenders but cater to different investor profiles.
Ultimately, the best choice depends on your individual risk appetite and investment goals. Consulting a SEBI-registered financial advisor can be invaluable to ensure optimal alignment with your specific investment objectives.
Remember, a well-diversified portfolio across market caps/sectors and asset classes may help manage overall risk while potentially benefiting from its growth potential.
This article first appeared on PersonalFN here
