Last Updated on June 28, 2021 at 9:53 am
In this article, we review ICICI Prudential Flexicap Fund, an open-ended dynamic equity scheme investing across large cap, mid cap & small cap stocks. The NFO period of this fund is between June 28, 2021, to July 12, 2021.
Why ICICI Prudential Flexicap Fund? As usual, some history is necessary to establish context. Prior to the SEBI Mutual Fund Categorization rules, there were no rigid market cap rules for portfolio creation. They could invest anywhere they like under the umbrella of a diversified equity fund.
SEBI also introduced definitions of large cap stocks (the 1st-100th company in terms of full market capitalization); mid cap (101st-250th company in terms of full market capitalization) and small cap stocks (251st company onwards).
From mid-2018 onwards, the multi-cap mutual fund category came into force. This must hold min 65% of equity and can invest across market caps. However, in Sep 2020, SEBI surprised everyone by modifying the multi-cap fund rules.
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They now wanted multicap funds to hold a minimum of 75% equity with 25% in large cap stocks, 25% mid cap stocks and 25% small cap stocks The deadline to comply was Feb 2021. Since this would affect some multi-cap funds with large AUM, fund houses appealed to SEBI.
SEBI then introduced a new category – flexi-cap funds in Nov 2020 and allowed existing multicap fund to either stay a multicap fund and comply with the new rules or rename themselves as flexi cap funds. A flexi cap mutual fund is an open-ended dynamic equity scheme investing across large cap, mid cap, small cap stocks with a minimum of 65% of assets in equity & equity related instruments.
To conform with the change, several AMCs converted their multicap fund to flexi cap from Nov 2020 to Jan 2021. For example, Parag Parikh Long Term Equity Fund became Parag Parikh Flexi Cap Fund.
ICICI Multicap Fund did not change. It chose to remain a multi-cap fund and comply with the new SEBI multicap rules. With effect from Jan 29 2021, its benchmark became Nifty 500 Multicap 50:25:25 instead of S&P BSE 500 TRI.
Now the AMC had a new fund category – flexi cap – in which it had no funds. That is why they have now come up with ICICI Prudential Flexicap Fund. As usual, they would use the NFO period to “energize” their distribution partners to gather as much AUM as possible. The fund house has a strong standing among its partners and recently amassed about Rs. 4000 crores during the NFO period in its Business Cycle Fund! So they would be hoping for a minimum collection of Rs. 1000 crores from this NFO.
Before we get into the fancy mumbo jumbo from the brochure of ICICI Prudential Flexicap Fund, let us take a look at the record of ICICI Prudential Multicap Fund. After all, aside from the last 4-5 months, they have been running it as a flexi cap fund for a while now.
| 3-Y | 5-Y | |
| ICICI Prudential Multicap Fund – Direct Plan | 14.55 | 14.9 |
| S&P BSE 500 TRI | 15.19 | 16.43 |
The Multicap fund has failed to beat the S&P 500 Index over the last 3 to 5 years when the fund has the full flexibility to invest across the market cap. Even if we discount the five year period, the last three year period was after the SEBI categorization rules kicked in. So this hardly evokes confidence in the flexi cap NFO’s strategy!
ICICI Prudential Flexicap Fund: Strategy
In the scheme’s presentation, the fund house has positioned ICICI Prudential Flexicap Fund as having a risk and reward in between a large cap fund and a large and midcap fund but also claim the fund can freely around in market cap. This is more a reflection of the funds current strategy:50-100% large cap and the rest in mid and small caps.
They will use an “in house marketcap model” to determine the attractiveness of a market cap segment. This model will use these parameters (among others!):
- Mid and Smallcap valuations as a % of total Marketcap
- Valuation: The model will consider Price to Book Value (P/B) discount/premium of Mid & Smallcaps Vs. Largecaps
- Relative Strength Index (RSI) Differential of Mid and Smallcaps Vs. Largecaps to determine which segment is oversold or overbought.
- Macro-economic indicators for both market cap and sector calls.
In addition, in the initial phase (after the NFO period), the fund will gradually deploy funds into equity taking into account market valuations (the scheme can hold up to 35% in debt or arbitrage opportunities
Now, all this sounds impressive (that is the only objective of an NFO brochure) but considering the less than impressive performance of ICICI Multicap fund for the reasons mentioned above, we see no reason to get excited about this new fund offering.
We recommend that investors give ICICI Prudential Flexicap Fund a miss. At the very least, one will have to give their “in house model” a few years to perform, but our investment goals will not wait until then. So it is best to leave the waiting to analysts.
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