Days after we predicted (for once rightly!) “Parag Parikh AMC might rethink their foreign equity investment strategy. After all, the flexicap is their flagship fund and main profit source. They would not like prolonged or repeated disruption to their income”, the fund house has announced that Parag Parikh Flexicap will reopen for investment from March 15th.
However, all inflows from March 15th will be in Indian equity and Indian bonds only until further clarification from SEBI and RBI regarding the overseas investment limit.
This move indicates that the mutual fund industry is uncertain of if/when the limit will be increased. Since the Flexi Cap fund is their main profit generator, they cannot afford to shut inflows for long.
Is the AMC allowed to do this? Yes of course. The scheme investment document clearly says they can vary overseas investments from 0% to 35%.
Is this not a change in the fundamental attribute of the fund? Technically and legally, no as mentioned above. Will this be a deviation in character? Yes. If the limit is not enhanced for long then overseas exposure will gradually reduce.
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How can the AMC do this without the consent of the unitholders? First of all, this is not a change in the fundamental attribute. That is, they are not going to do anything that they have not mentioned in the scheme information document.
Even for fundamental attribute changes, unitholders only need to be informed and offered an exit-load free window to redeem. Consent is not necessary!
How will this affect the fund and our returns?
This is the historical overseas exposure in Parag Parikh Flexi Cap.
Assuming the overseas investment limit is not enhanced soon by RBI, the overseas exposure will gradually decrease.
What are the implications of this?
- The volatility in the NAV may increase a little.
- The return can come down.
- The ability of the fund to outperform Nifty 500 TRI consistently (something it has done well so far) could decrease.
What should investors do?
We had already mentioned that overseas equity should not be the only reason to invest in Parag Parikh Flexi Cap (PPFC). We recommend investors continue to invest in the fund but with lower expectations of reward and risk management.
As already pointed out, the AUM of the fund is swelling up at a quick pace and the law of averages can be expected to strike soon. So overseas equity or no overseas equity, the performance may not sustain in future.
What I am going to do: PPFC is the highest holding in my retirement equity portfolio at about 58% (among MFs). HDFC Hybrid Equity comes in next at about 26% and Quantum Long Term Equity at 16%. I have invested in UTI Low Volatility Index Fund as a replacement for Quantum Long Term Equity (which I shall shed gradually) than for PPFC. Going forward, I shall continue to invest in PPFC along with HDFC Hybrid and UTI Low Vol. Further investments in PPFC may be lower due to its higher weight and not this development.
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