Can you clone Parag Parikh Flexi Cap Mutual Fund?

The Parag Parikh Flexi Cap Fund is an extremely popular fund in the flexi-cap category. The fund has consistently outperformed its benchmark NIFTY 500 TRI and its peers in the Flexi Cap category.Moreover, the fund has never delivered a negative return if an investor stayed invested for seven years. In fact, the minimum returns the fund has delivered for any 7-year period is 14%. That’s considerably higher than the 8% returns that NIFTY 500 TRI has delivered.But, what if we tell you that you can create your own PPFAS Flexi Cap Fund? We recently came across a blog from Sharat Chandra that argues the PPFAS Flexi Cap Fund simply mirrors the performance of the Nasdaq and NIFTY 500 indices. It means one can easily duplicate the amazing performance delivered by PPFAS Flexi Cap Fund.In this blog, we will look at PPFAS Flexi Cap Fund’s performance, and its investment strategy, and examine how easy or difficult it is for an investor to replicate the fund’s strategy on their own. Let’s begin with the fund’s strategy and performance.Investment Strategy And Performance Of Parag Parikh Flexi Cap FundBeing an equity fund, Parag Parikh Flexi Cap needs to invest at least 65% of its assets in domestic equity. For the remaining 35%, the fund manager has the freedom to invest in other types of assets such as debt, international equities, etc. Now, typically, the scheme has maintained an international allocation of at least 20% since its inception.Break-up Of Parag Parikh Flexi Cap Fund PortfolioMonthDomestic equityInternational equityOthersJune 201472.321.06.7June 201566.424.78.9June 201665.728.36.0June 201766.226.37.5June 201865.628.16.3June 201965.627.86.6June 202065.428.95.7June 202165.529.74.8June 202270.822.76.5Note: All figures are in %Over the years, the above combination of asset classes has helped the fund outperform its benchmark in most years.Parag Parikh Flexi Cap vs NIFTY 500 TRIYearFund PerformanceBenchmark: NIFTY 500 TRIAlpha201445.539.3+6.220159.50.1+9.420163.94.7-0.8201730.137.8-7.720180.2-1.6+1.8201915.38.7+6.6202033.617.8+15.8202147.031.2+15.82022-7.0-1.3-5.7Note: All figures are in %Now, the NIFTY 500 isn’t really an ideal benchmark for any fund which keeps around 28% of its assets in foreign stocks. Hence, the benchmark will have to be tweaked a bit. Let’s take a 65% allocation to the NIFTY 500 and a 35% allocation to the Nasdaq 100.Why use the Nasdaq 100? It’s because the Parag Parikh Flexi Cap Fund has consistently invested and held onto stocks of big names like Microsoft, Facebook and Alphabet which occupy a significant portion in the Nasdaq.Parag Parikh Flexi Cap Fund vs NIFTY 500 TRI (65%) + Nasdaq 100 (35%)YearFund performance (Direct plan)65% NIFTY 500 TRI + 35% Nasdaq 100Alpha201445.531.8+13.720159.53.0+6.520163.95.1-1.2201730.135.6-5.520180.2-1.4+1.6201915.319.0-3.7202033.628.2+5.4202147.029.6+17.42022-7.0-8.2+1.2Note: All figures are in %Other than 2014 and 2021, the variation between the flexi cap fund and this 65-35 combination has been within a tight range. The gap between the two reduces further if you rebalance on a monthly basis.The above chart shows that the Parag Parikh Flexi Cap’s monthly NAV is tightly correlated with the performance of the 65-35 benchmark index. It effectively means that this 65-35 combination of the NIFTY 500 and Nasdaq 100 could efficiently clone the performance of the Parag Parikh Flexi Cap Fund.It is odd for an actively managed fund like the PPFAS Flexi-cap fund. After all, it can choose stocks across market caps and sectors.Is Parag Parikh Flexi Cap Investing Like an Index Fund?Not really. Parag Parikh Flexi Cap Fund’s performance is close to the 65-35 benchmark index. But, the fund has not invested in all the stocks of NIFTY 500 and Nasdaq 100. It had almost always held around 30 stocks in the portfolio.The next argument could be that these 25-30 stocks held by the fund are the highest weighted stocks among NIFTY 500 and Nasdaq 100 companies. But data shows that isn’t really the case. The Parag Parikh Flexi Cap Fund continues to invest in its sector and capitalisation agnostic style.NIFTY 500 stocks In Parag Parikh Flexi Cap Fund portfolioJune 2021June 2022Bajaj Holdings & InvestmentITCITCBajaj Holdings & InvestmentPersistent SystemsHDFCHCL TechnologiesICICI BankIndian Energy ExchangeHero MotocorpMphasisCoal IndiaMulti Commodity Exchange of IndiaAxis BankAxis BankPower Grid Corporation of IndiaICICI BankHCL TechnologiesBalkrishna IndustriesIndian Energy ExchangeA similar pattern shows up in the case of international stocks with the flexi cap fund investing in only 5 stocks from the basket of 100 that comprise the Nasdaq 100 index.Nasdaq 100 stocks in Parag Parikh Flexi Cap Fund portfolioJune 2021June 2022Alphabet (Google Class A)Alphabet (Google Class A)Microsoft CorpMicrosoft CorpMeta (Formerly Facebook)Amazon.comAmazon.comMeta (Formerly Facebook)Suzuki Motor CorpSuzuki Motor CorpBottom LineWhile the performance matches, there doesn’t seem to be any intent of closet indexing with the PPFAS. In fact, the argument in favour of the PPFAS fund managers is that they had the gumption and conviction to invest in foreign stocks when every fund house was sticking to domestic stocks.

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