Weekly Musings – NFO Pick (TrustMF Flexi Cap Fund)

31 Mar 2024 , 09:32 AM

HOW DO FLEXI-CAP FUNDS INVEST?

Flexi cap funds, like the upcoming NFO of TrustMF Flexi Cap Fund, are essentially equity funds that spread their portfolio across large caps, mid-caps, and small caps. It can be seen as a more discretionary form of multi-cap funds. In multi-cap funds, there is a statutory requirement to have at least 25% of the portfolio each in large caps, mid-caps, and small caps. The last 25% offers discretion. However, in a flexi cap fund, the fund manager has the full discretion to even go up to 100% in any category. One of the advantages of a flexi-cap fund is that over the last 16 years, large caps, small caps, and mid-caps have been star performers in different years. Combining them with a sense of asset allocation can give above market returns, combining the safety and stability of large caps with the alpha potential of small and mid-caps.

UNDERSTANDING GORILLA INVESTING APPROACH OF TRUSTMF FLEXI CAP FUND

One of the explicit strategies of the TrustMF Flexi Cap Fund will be the Gorilla approach to investing. Here is what the Gorilla approach to investing means.

• The Gorilla approach to investing will focus on companies that are rare, dominant, and unchallenged in a certain niche. In terms of its core characteristics, it will almost be akin to a Gorilla.
• The Gorilla approach to investing focuses on scalability, adaptability, and resilience. Scalability is the ability to translate a successful business model into a scalable model in a short span of time. Adaptability is the ability to adjust the business model to the changing times while resilience is the ability to survive and thrive in tough times.
• In terms of stock selection, the Gorilla Approach will focus on leadership and vision of the management, intangibles moats like goodwill, brands etc; and the ability to tap mega trends in the market like rising incomes, changing consumer preferences etc.

But, is there a case for adopting the flexi cap approach?

WHY A FLEXI APPROACH AT THIS JUNCTURE?

There are several reasons why a flexi cap approach should work best now.

• In the last 18 years; large caps dominated in 7 years, mid-caps in 3 years and small caps in 8 years. That is a clear case to mix them to get the best chance at alpha.
• If you look at the top-3 and bottom-3 sectors in last 10 years, many of the sectors are found in both lists. Clearly, sectoral mix is not enough and a market cap mix is needed.
• Across the large caps, mid-caps, and small caps, there are stock selection opportunities where the top-10 stocks have substantially outperformed the median returns.
• For the Gorilla approach of the fund, Indian markets offer a universe of ₹313 Trillion and high growth opportunity of ₹93 Trillion; spread across large, mid, and small caps.

When you combine this opportunity with the big India trends like consumption, financialization of savings, physical asset creation, shift to organized sector, digitization, urbanization etc, it opens up a huge opportunity via flexi-caps.

PERFORMANCE OF FLEXI CAP FUNDS IN INDIA

Here is a quick look at the open ended Flexi Cap funds in India as of March 29, 2024. These are CAGR returns for beyond 1 year, and pertain to direct plans.

Scheme Name	NAV (in ₹)	Return (%) 1-Year	Return (%) 5-Year	Return (%) Launch	Daily AUM (₹ Crore)
ITI Flexi Cap Fund	15.48	55.38	N.A.	48.22	849.50
Bank of India Flexi Cap Fund	32.07	61.72	N.A.	36.47	730.05
Mirae Asset Flexi Cap Fund	13.59	36.87	N.A.	32.49	1,682.31
WhiteOak Capital Flexi Cap Fund	14.58	45.22	N.A.	25.57	3,203.49
Invesco India Flexi Cap Fund	15.58	49.38	N.A.	23.29	1,486.83
Baroda BNP Paribas Flexi Cap Fund	13.88	42.00	N.A.	22.47	1,254.96
Quant Flexi Cap Fund	101.98	59.47	30.17	21.07	4,487.14
ICICI Prudential Flexicap Fund	16.73	46.50	N.A.	20.99	14,573.76
Parag Parikh Flexi Cap Fund	74.87	41.13	23.80	20.41	60,091.97
Sundaram Flexi Cap Fund	13.09	35.28	N.A.	18.86	2,090.03
JM Flexicap Fund	94.81	59.10	23.32	18.64	1,742.31
Motilal Oswal Flexi Cap Fund	52.79	55.71	14.16	18.25	9,632.48
Franklin India Flexi Cap Fund	1,536.48	45.46	19.15	17.37	14,510.69
Kotak Flexicap Fund	79.59	35.93	16.10	17.11	45,922.00
Aditya Birla Sun Life Flexi Cap Fund	1,653.36	38.44	16.40	17.09	19,964.73
HDFC Flexi Cap Fund	1,740.43	44.10	19.43	17.03	50,787.94
Nippon India Flexi Cap Fund	14.99	42.29	N.A.	16.73	6,236.63
SBI Flexicap Fund	106.58	31.91	15.72	16.61	20,284.75
Mahindra Manulife Flexi Cap Fund	14.81	40.54	N.A.	16.32	1,231.86
HSBC Flexi Cap Fund	202.39	44.68	16.93	15.91	4,246.07
Shriram Flexi Cap Fund	22.26	43.54	15.79	15.65	82.73
DSP Flexi Cap Fund	92.81	37.46	17.88	15.60	9,976.53
Navi Flexi Cap Fund	22.65	31.49	15.96	15.36	242.41
Canara Robeco Flexi Cap Fund	320.36	35.28	17.99	15.34	12,068.45
Tata Flexi Cap Fund	22.09	37.02	15.84	15.31	2,612.55
Edelweiss Flexi Cap Fund	36.30	42.58	18.94	15.12	1,689.21
PGIM India Flexi Cap Fund	35.86	28.67	20.57	15.11	5,953.92
Axis Flexi Cap Fund	24.42	35.07	16.08	15.08	11,558.74
Bandhan Flexi Cap Fund	193.73	38.12	14.57	14.91	6,709.66
UTI Flexi Cap Fund	287.95	23.87	14.27	14.42	24,261.39
Union Flexi Cap Fund	49.61	41.99	19.45	14.38	1,985.93
LIC MF Flexi Cap Fund	93.34	33.54	15.38	11.45	934.70
Taurus Flexi Cap Fund	211.26	43.70	12.54	11.12	329.58
Samco Flexi Cap Fund	11.85	31.67		8.23	717.10

Data Source: AMFI India

In the table above, we have covered all the open ended flexi cap funds, which are actually equity funds mixing large caps, mid-caps, and small caps on a flexible formula. We have considered direct plans of funds for comparison to avoid the impact of total expense ratio (TER) differentials. There are 34 open ended flexi cap funds in India, having a flexible approach to allocation across market cap ranges. These 34 flexi cap funds, manage a corpus of ₹3,44,132 Crore between them; which makes them among the dominant categories of equity funds in India. Out of these 34 funds, the AUM is fairly well spread across the various fund names with a total of 27 out of 34 flexi cap fund schemes having AUM of more than ₹1,000 Crore. Here are highlights of the performance of flexi cap plans across time frames.

• The return dispersion is quite high and that is largely because this is a flexible approach to equity mix of large caps, mid-caps, and small caps. On a 1-year returns basis, flexi cap universe in India has generated maximum returns of 61.72% and minimum returns of 23.87%, showing substantial variation due to the flexible allocations permitted in flexi cap funds. The average returns over a 1 year period are 41.62%, which is fairly impressive. One year returns may not be too illustrative as they are overly impacted by the big rally in equities in the last one year.
• Based on 5-year CAGR returns, the open-ended Flexi Cap Funds universe in India generated maximum returns of 30.17% and minimum returns of 12.54%, showing a fairly high variation on a 3-year time frame basis. The average returns CAGR over a 5-year period were 17.85%, but here the returns have less impact as an average number due to the wide variations in the portfolio mix and the performance of flexi-cap funds.
• Based on returns since launch, the flexi cap funds universe in India generated maximum returns of 48.22% and minimum returns of 8.23%, showing a fairly high variation on a longer time frame basis. The average returns since launch were 18.77%, but here again, the wide variance make the central tendency slightly suspect.
• Out of the overall AUM of ₹3,44,132 Crore; 3 flexi cap funds viz. Parag Parikh Flexi Cap, HDFC Flexi Cap and Kotak Flexi Cap accounted for 45.6% of the overall AUM of all flexi cap funds between them. If you take the top-6 flexi cap funds by AUM, they account for 64.3% of the overall AUM, showing substantial concentration in a handful of funds.

Comparison across flexi cap funds can become complex, at times. Unlike multi-cap funds, these flexi-cap funds do not have to follow any specific rule on allocations and hence funds can be vastly different their portfolio mix and their capitalization bias. However, flexi-caps as a category have generally lagged multi-caps in India as a group.

GLANCE AT THE TRUSTMF FLEXI CAP FUND NFO

Here are some details of the TrustMF Flexi Cap Fund NFO you must know to decide on investing in the fund.

• The NFO of TrustMF Flexi Cap Fund opens for subscription on April 05, 2024 and will close on April 19, 2024. Being an open-ended equity scheme, the fund will offer buy and sale at NAV linked prices. While the fund has no lock-in period, it is best to hold such flexi cap funds for a period of 5-7 year or more to get full equity cycle benefits.
• On the Standard SEBI Risk-O-Meter, the PGIM India Retirement Fund will be ranked as a Very High Risk Fund. The high risk is due to the predominant exposure to equities that the TrustMF Flexi Cap Fund will have. In addition, there is the additional risk of entering with NFO funds when the market is at an all-time high. In addition, there is also the discretion risk of fund managers when they mix large caps, mid-caps, and small caps.
• The TrustMF Flexi Cap Fund is about long term capital appreciation with a mix across beta generating large caps and alpha generating small and mid-cap stocks. The AMC brings a strong equity driven cult of thinking to the business and that is likely to work best if investors hold on for a longer time frame of 5 to 7 years.
• Investors can invest in the NFO of TrustMF Flexi Cap Fund in minimum size of ₹1,000 and in multiples of ₹1 thereof. This also applies to switch-ins during the NFO. The question of entry loads do not arise. However, Exit loads will be charge at 1% of the redemption amount if redeemed or switched out within 180 days. Beyond 180 days, there is no exit load. For SIP investments, the minimum requirement is 6 instalments of ₹1,000 each for monthly SIPs and 4 instalment of ₹3,000 each for quarterly SIPs.
• The TrustMF Flexi Cap Fund does not give any guarantee on returns, being a pure equity fund. The fund can maintain a small portion of funds in debt, but has full flexibility in toggling the portfolio mix between large caps, mid-caps, and small caps. While there is no exit load beyond 180 days, investors must hold on to the fund for minimum of 5-7 yeas to get the full benefit of equity market cycles.
• The TrustMF Flexi Cap Fund NFO will offer the growth option as well as the IDCW (income distribution capital withdrawal) payout option. It will offer the facility to invest via the Regular Plan or through the Direct plan. The NAVs on redemption will be different based on the TER imputed to the fund. All fund units will be issued at a face value of ₹10 only. The NAVs of the growth plan and the IDCW plan will also be different if dividends are declared.
• The fund is best suited for investors with a higher risk appetite and the ability to stay invested for a longer period of time. Investors in the TrustMF Flexi Cap Fund NFO must be prepared for the additional risk of fund manager discretion in allocation across large caps, mid-caps, and small caps.
• The TrustMF Flexi Cap Fund will be benchmarked to the Nifty 500 TRI index. The TRI (total returns index) is more reflective as it includes the impact of dividends and capital movement. This benchmarking is used to evaluate whether the fund is underperforming or outperforming the underlying benchmark. The fund managers for the TrustMF Flexi Cap Fund will be Mihir Vora and Akash Manghani.
• The TrustMF Flexi Cap Fund NFO will allocate its corpus predominantly to equities while a small portion will be allocated between debt and liquid assets. With equity exposure decisively above 65%, it will be classified as an equity fund for tax purposes. Hence short term capital gains (held for less 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% after a minimum threshold exemption of ₹1 Lakh per financial year.

The TrustMF Flexi Cap Fund NFO is an opportunity for investors to systematically invest in a mix of small caps, large caps, and mid-caps through a discretionary approach. It largely dilutes the inherent risk of equities in the long run.