PPFAS Asset Management, the fund house that revolutionized the flexi-cap category with its flagship offering, is now preparing to enter the highly competitive large-cap mutual fund space. The company has filed draft documents with SEBI for the Parag Parikh Large Cap Fund, marking its third equity scheme after the immensely successful Parag Parikh Flexi Cap Fund and Parag Parikh ELSS Tax Saver Fund.
From Flexi-Cap Dominance to Large-Cap Challenge
Since launching its first mutual fund in May 2013, PPFAS has maintained a remarkably minimalist approach, introducing only five additional schemes over nearly a decade. The original flexi-cap fund remains their crown jewel, managing assets worth approximately ₹1.26 trillion as of October 31, 2024. This makes it the largest scheme in the flexi-cap category by a significant margin.
The upcoming large-cap fund will operate under SEBI's strict guidelines, requiring at least 80% investment in India's top 100 companies by market capitalization. The remaining 20% can be allocated to stocks beyond the top 100, foreign equities, debt instruments, REITs, and InvITs. The scheme will benchmark itself against the Nifty 100 Total Return Index.
Differentiation in a Crowded Space
The key question facing PPFAS is whether they can bring meaningful differentiation to a category where all funds operate within the same universe of 100 stocks. According to Neil Parag Parikh, Chairman and CEO of PPFAS AMC, the company only launches new schemes when they can provide simplification or differentiation to existing categories, or when regulatory changes compel them to do so.
Dhirendra Kumar, Founder and CEO of Value Research, believes differentiation is possible but limited. "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," he notes. "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."
Timing and Investment Philosophy
Aarati Krishnan, Head of Advisory at Primeinvestor.in, sees potential in PPFAS's valuation-conscious approach. "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," she explains. "There are value-buying opportunities in the large-cap space in sectors such as financial services, IT, and pharma."
Krishnan also points to favorable market timing. "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."
Potential Challenges and Constraints
One concern for investors is potential portfolio overlap between the new large-cap fund and PPFAS's existing flexi-cap offering. The flexi-cap fund currently maintains significant flexibility, with approximately 66% in Indian equities and 11.50% in foreign equities as of October 31, 2024.
Another challenge involves PPFAS's tendency to maintain higher cash levels when investment opportunities are scarce. The flexi-cap fund held nearly 22% in cash, debt, and money market instruments in October, reflecting their disciplined approach. However, in a large-cap fund, regulatory constraints limit such flexibility, with only 20% available for non-large-cap investments.
Kumar highlights this constraint: "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. So yes, given their strict valuation approach, they will hit the 'nothing worth buying at these prices' wall faster in a bull market."
Despite these challenges, Krishnan remains optimistic about immediate opportunities, noting that the launch coincides with a phase where several large-cap sectors are out of favor, potentially providing ample investment options.
Investors and industry watchers await further details from PPFAS's annual unitholders meeting scheduled for November 22, where the company plans to address all questions about the proposed large-cap fund launch.
