Thread by @may27capital

Here's another write-up this weekend as we tried to understand what makes Parag Parikh flexicap different from other funds. It covers brief history, the right way to look at returns, risk measurement, and fund's management.
A thread 🧵🧵🧵
#ppfas
may27capital.substack.com/p/choosing-a-m…

Mutual funds pool money from various investors and invest in stocks, bonds, or other securities. The main objective of these funds is to help investors build wealth over a period of time.
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The Indian mutual fund industry has 44 AMCs in total offering a plethora of schemes and catering to all types of investor needs. However, choosing the right scheme based on the investors’ needs can be challenging, since there are too many options available in the market.
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The objective of MFs is to simplify the process of investing. But it’s unfortunate that with increased demand and huge competition in the market, AMCs are flooding the market with NFOs every now and then. What can a humble investor do to pick from so many funds?
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But there is #PPFAS (Parag Parikh Financial Advisors), which has launched only 4 funds to date. Their flagship flexicap fund (formerly known as long-term equity fund) has gained a lot of traction from the investors.
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As part of reading books on investing, we read Legendary Mr. Parag Parikh’s “Stocks to riches”. The book had great insights on aspects of behavioral finance and Parag Parikh’s interactions with customers in his more than a decade of experience as a sub-broker.
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He is considered a value investing guru in India and had written another book called “Value investing and behavioral finance”. He later gave up his license to start an AMC in his name. #ppfas
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n 2015, unfortunately, he passed away in a tragic car accident at the age of 61 when he went to the US to attend Warren Buffet’s annual shareholders’ meeting of Berkshire Hathaway.
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Parag Parikh’s Flexi cap fund can be called a “Go anywhere” fund because this fund has the flexibility to invest in Indian and foreign companies irrespective of market capitalization and sectors. Flexicap funds must invest 65% of total assets in Indian equities.
#ppfas
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This is a local fund with a Global focus and it has global advantages without tax disadvantages. Because an average of 65% of its corpus is invested in listed Indian equities, which it benefits from the favorable Capital Gains tax treatment.
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Some basic details about #ppfas flexicap fund:
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The top 5 Indian stock holdings of the fund are Baja Holdings, ITC, IEX, HCL Tech, and ICICI Bank.
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The top 5 global holdings of the #ppfas flexicap fund are Alphabet (Google), Microsoft, Amazon, Meta platforms (Facebook), and Suzuki Motor Corp.
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Returns:
▪️As per Dec 21 factsheet, the fund has generated 20.95% CAGR returns compared to its benchmark NIFTY500’s 15.81% and NIFTY50’s 14.59%.
▪️The fund has outperformed its benchmark index (Nifty 500 TRI) by generating a higher alpha in the last 1yr, 3yr, and 5yr period
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▪️₹10k invested in the fund on May 24th, 2013 would have become ₹51,429 if you invested in the fund through a regular plan (MF distributors).
▪️MF investments made through direct plans have a lesser E/R cutting down the commission taken by distributors and enhancing the returns

These returns are calculated in terms of CAGR. It is the average annual returns the fund has generated. But CAGR returns do not give you a clear picture. Consider an MF that was started 5 years ago. And the fund hasn’t performed well in the 1st 4 years since its inception.
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But in Mar 2020, when the market crashed due to COVID, the fund has picked stocks like Bajaj Finance and Divis at very cheap valuations.
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Now the CAGR returns for the past 5 years may show that MF has generated good returns. But in reality, the fund got lucky in one year and spread the benefit to the past 4 years
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How can an investor know the consistency of the fund over the yrs? By calculating the rolling returns. They are annualized average returns for the period beginning from the 1st date to the last date. The returns are calculated every day of the period and then averaged
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Rolling returns provide an accurate and in-depth picture of the fund’s performance and its consistency across time frames, unlike the above example where 1-year performance has painted a positive picture on the other 4 years.
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As a thumb rule, look for rolling returns when investing in an MF.5 year rolling returns data Vs category and top 4 funds in flexicap shows that #ppfas flexicap stands out in all parameters.
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But investment decisions should not be made based on the historical returns alone. Since risk is a crucial factor in any investment, let us also look at some risk measurement tools, to understand the fund in a better way.
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Risk Measurement Tools:
e have taken 4 Flexi cap funds to do the comparison. According to ET Money, these are the 4 funds that top the list among its category.
#ppfas

▪️ Standard Deviation: It represents the volatility or riskiness of the fund. Lower the SD, lower will be the volatility and risk. #ppfas flexicap has an SD of 17.7, which is the lowest among the four.
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▪️ Sharpe Ratio: It tells us if the returns generated are because of the wise investing decisions made by the fund managers or because of the excessive risk taken. Higher the Sharpe ratio, better risk-adjusted returns are generated. #ppfas has the highest Sharpe ratio among all.

Sortino Ratio: It estimates the excess return adjusted only for the downside risk. This ratio helps the conservative investors who wouldn’t want to take risk of losing money. Higher the Sortino ratio, the lesser the chance of down-side deviation. PPFCF has a Sortino ratio of 1.43

▪️Beta: It is the relative risk of the MF against its benchmark and doesn’t give an inherent risk. If the beta of an MF is less than 1, then the fund is perceived as less risky compared to its benchmark. The beta value of PPFCF is 0.72, this is less compared to other funds
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▪️Alpha: It tells us how much better the fund has performed when compared to its benchmark index. #ppfas flexicap ranks 2nd in generating an alpha of 13.44 after Quant, which has generated 15.53.
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Therefore, we can conclude that PPFCF has generated higher alpha, high Sharpe Ratio, and Sortino ratio, which indicates the fund’s better performance. In addition to this, it has a low Standard Deviation and a low Beta which indicates a lower level of volatility in the fund.
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Though some numbers if looked at in isolation suggest that PGIM is also worth looking at, things like PGIM having a higher standard deviation compared to #ppfas flexicap shows us that the latter will offer better risk-adjusted returns.
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We would like to thank @shankarnath Sir at ET money. He and his team's videos on Youtube had a great impact on our understanding of MFs.

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We would suggest you all watch their Mutual funds for beginners playlist that we shared above to learn and understand anything and everything about MFs in India.
@ETMONEY
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How is #ppfas different from other AMCs?
Currently, PPFAS has only 4 schemes namely
Flexi cap fund,
Liquid fund,
Tax saver fund, and
Conservative hybrid fund.
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#ppfas management follows a focused approach. They neither have too many schemes nor they are involved in other businesses like brokerage or distribution. They remain focused on Mutual funds and their work both effectively and efficiently.
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#ppfas Investment Approach: Value Investing
The fund buys businesses that have low debt, high cash flows, investor-friendly management, competitive advantage, etc.
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It prefers buying stocks that are trading at a discount to their intrinsic value to create value for the investors. Avoids buying overvalued stocks. These are the filters that they look at before buying a business.
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Key takeaways from the unitholders’ meet:
Strongly believes in long-term investing. They have the patience to hold stocks even if the stock price is stable for a long time, given that the business is growing as they wanted it to. its reflected in their long-holding periods
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▪️ Skin in the game: Invests their own money in 3 out of 4 schemes except for the conservative hybrid fund. Moreover, they started investing their own money even before SEBI mandated the fund houses to invest.
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▪️Trust: Management focuses a lot on building trust. They don’t launch a flavor of the month scheme, no chasing of AUM, and have an open channel of communication.
▪️Avoids new age IPOs, expensive or fancied sectors.
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▪️ #ppfas doesn’t launch a new scheme out of FOMO. They would launch a new scheme only when they feel excited about it and feel confident in investing their own money.
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▪️They believe that it’s a profession rather than a mere business. They do what is in the interest of unitholders rather than chasing AUMs, top line, and bottom line.
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A note on high AUM: Increasing AUM shud not worry investors abt the future returns because this is a Go anywhere fund. With a greater no of IPOs coming, with limited imposed restrictions on this type of fund, they do have higher flexibility in allocating the portfolio amount
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Also, management says when they feel that higher AUM is becoming a problem, then without any hesitation, they are ready to stop taking more inflows into the fund.
#ppfas
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What makes Parag Parikh Flexi cap fund different from other funds?
▪️Wider choices: Several world-class companies dont have Indian subsidiaries that are listed. Also, there are innovative companies like FB, Google, Microsoft, etc., for which there is no Indian substitute
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Reduces country risk: Most equity MF schemes help investors diversify across industries within the same country. However, investors could still be affected if there are negative events throughout the country like a pandemic, drought, political turmoil, etc.
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Valuations: Sometimes, the Indian subsidiary of an MNC may be very highly valued, and hence not investment-worthy. But an advantage can be taken from its parent company, which can be available at a much more reasonable valuation.
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Covered call strategy: Why does the fund do this?
Let us assume #ppfas has bought a stock assuming it will perform well. But if the investment thesis goes wrong and this stock does not give any returns or worse it might end up in a loss for the fund. So what can the fund do?
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The fund implements a covered call strategy by selling call options of the same stock that it holds. Call options are a type of derivatives where you get into an agreement that the stock can be traded at a fixed price in that time period.
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Here's a tweet thread by @KirtanShahCFP explaining how the covered call strategy works for PPFCF.
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https://twitter.com/kirtanshahcfp/status/1305181055746359296

In simpler, the fund is betting on the outcome of the stock price going up, being flat, and going down. If the price of the stock rises, the fund will lose some money. But if the price of the stock remains flat or falls further, the fund will make some money on these call options

Conclusion:
Above all other good aspects about the fund, the biggest thing we like about the Parag Parikh Flexicap fund is its management and its value-based approach towards investing. Their great communication with unitholders is exceptional.
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#ppfas

Some key decisions of the fund like investing in ITC and using derivatives for covered call strategy led to a lot of unitholders questioning the intent of the management. They themselves came up with a questionnaire and answered unitholders on the website nd their youtube channel

I have seen most of the MF community getting disappointed with the “Skin in the game” rule by SEBi that mandated the fund’s management to have a stake in funds they manage.
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But Parag Parikh’s management held stakes even before this rule came into existence. They collectively held 1.46% of their total AUm i.e ₹283.763 Crores as of December 31, 2021. This speaks volumes about the management.
#ppfas
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Though we generally believe that low-cost index funds are the best instruments for a common average investor to build wealth over time, if there is one active fund that we are comfortable holding for a long period of time, that would be the Parag Parikh Flexicap fund.
#ppfas
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Thanks for reading through patiently. This write-up is for educational purposes and not investment advice. Please consider subscribing to our Substack newsletters and follow us if you liked the write-up. Link to the top of this thread. Happy Investing

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