That’s why its announcement of a proposed large-cap fund drew unusual attention, with investors questioning how it would stand apart when all large-cap funds draw from the same top 100 stocks by market capitalization.
At its unitholders’ meeting on 22 November, the fund house finally laid out the fund’s strategy, positioning and what it will—and will not—attempt to do.
According to PPFAS MF, the proposed large-cap fund is not meant for investors seeking concentrated sector bets or active stock selection to significantly outperform the Nifty 100 TRI (total return index). Instead, it aims to offer slightly better returns than index funds by using execution efficiencies—while keeping costs comparable to passive funds.
The scheme targets investors who want broad exposure to the top 100 companies by closely following the index and consequently paying a relatively lower expense ratio.
So, how will the scheme differentiate itself and offer more than what index funds do?
According to Rukun Tarachandani, executive vice-president and fund manager—equity at PPFAS MF, as an active fund, their use of ‘smart execution strategies’ (more on this later) is what will differentiate them and add value to what index funds offer.
The scheme expense ratio will be similar to what Nifty 100 Index funds charge their investors.
The scheme offering
The Parag Parikh Large Cap Fund will provide exposure to Nifty 100 companies broadly in line with their index weights, based on free-float market capitalization, subject to a 10% cap on any single holding.
The direct plan’s expense ratio will be between 10-30 basis points (bps)—similar to Nifty 100 index funds—with the fund aiming for the lower end as assets under management (AUM) scale.
The Axis Nifty 100 Index Fund, the largest Nifty 100 Index fund, has an expense ratio of 21 basis points (direct plan). The HDFC Nifty 100 Index Fund, a distant second, charges 30 basis points (direct plan).
Explaining why PPFAS MF has chosen to benchmark the scheme to the Nifty 100 instead of the Nifty 50 or the Sensex, Tarachandani said this is because of the index’s broader coverage.
As per data shared at the unitholders meet, the Nifty 100 covers 67% of the market capitalization and 75% of the profit pool of the top 500 listed companies. On the other hand, the Sensex covers only 40-44% and the Nifty 50, 49-54% of the market cap and profit pool of these 500 companies.
Where it seeks an edge
Where the Parag Parikh Large Cap Fund intends to differentiate is by using strategies that lower execution costs. Tarachandani highlighted several such approaches at the unitholders’ meet, which was live streamed from Mumbai.
For instance, the fund can buy a stock in the futures market if it trades at a discount to the cash market, thus securing a lower buy price. In periods of market panic, index futures often trade at a discount to the index; buying futures then offers cheaper exposure.
Upcoming mergers can also create low-cost execution opportunities. In the run-up to the HDFC-HDFC Bank merger in 2023, for example, HDFC shares could have been bought to eventually get HDFC Bank shares at a discount—a strategy PPFAS MF used for its flexi-cap fund.
The fund can also benefit from index rebalancing cycles. Index rebalancing announcements are made by stock exchanges prior to the rebalancing date from which such changes are to take effect. Index funds, however, transact only on the rebalancing date, leading to heavy inflows/outflows into added or removed stocks and sharp price movements. Since this information is public, active funds can accumulate stocks added to the index gradually instead of buying them in one go on the rebalancing day, achieving better pricing.
Should you invest?
While the proposed large cap fund offers the potential for better returns than passive funds, investors may have to wait to see actual performance. The launch is still about two months away.
According to Arun Kumar, an investment expert and former VP – head of research at FundsIndia, investors could wait for a track record before committing. “The idea of the fund is not to beat the market through stock picking but through smarter execution. It will mimic a large cap index fund with comparable charges. Passive investors can wait for 1-2 years of track record before choosing it.”
Avinash Luthria, a Sebi registered investment advisor at Fiduciaries.in, however, thinks differently.
“A Nifty 50 Index Fund from one of the larger AMCs, with a predictable TER (total expense ratio) of around 20 bps, is the only domestic equity fund that I have ever recommended. I am not willing to recommend an incremental unpredictable TER of around 10 basis points, in the hope of higher returns,” said Luthria.
Ultimately, what matters is how much additional return the fund can generate compared to similar index funds, and at what expense ratio.
Large cap vs flexi cap
For long-term equity portfolios (five years and above), flexi-cap funds may still be the better option.
“Given their mid- and small-cap allocations, flexicap funds can carry higher return volatility than large-cap funds. However, to take advantage of the full range of opportunities available in the Indian market, we believe investors need to own stocks across market cap segments. We therefore think that flexicap funds are the better all-weather product for investors who like to build long-term equity portfolios, especially those taking the SIP route,” said Aarati Krishnan, Head of Advisory, Primeinvestor.in, a regulated research platform.
Kumar offered a similar view.
“We prefer flexi cap funds to large cap funds for an investor’s core portfolio (funds that you hold for the long-term). They have a large cap bias with mostly 60-80% large cap stocks but with the flexibility to modify their allocation across market capitalization. We use large cap funds only for tactical allocation (to take advantage of short-term opportunities) when large cap stocks become extremely attractive.”
For investors who still want large cap exposure, index funds may remain the better choice until the PPFAS MF scheme establishes a performance record.