In Could 2025, the AUM of Parag Parikh Flexi Cap Fund crossed 1,00,000 Crores, making it the most well-liked lively fund. Will this massive AUM have an effect on its efficiency?
AUM vs. efficiency is a difficult topic, and it isn’t straightforward to attract helpful conclusions. What we will say for certain is that AUM is prone to impression flexibility. That is our earlier analysis on the topic:
For instance, a small cap fund that features reputation might be compelled so as to add extra massive cap shares to make sure sufficient liquidity to deal with massive AUM inflows or outflows. A fund churning its portfolio lots when its AUM was low might be compelled to churn much less because the inflows swell.
Typically, a big AUM makes it troublesome for the fund supervisor to promote a inventory hit by unhealthy information or lose the market’s favour. It additionally makes it troublesome to purchase massive portions of inventory. The issue is. All these appear apparent, however it’s laborious to correlate this with poor efficiency.
Take the case of a Parag Parikh Flexi Cap Fund. What do you anticipate to occur to its portfolio as its AUM will increase?
- It ought to maintain decrease and decrease portions of (Indian) mid cap and small cap shares.
- Its portfolio turnover ratio might go down.
Allow us to discover out if that is true. Earlier than we do that, there may be one more side of the fund’s efficiency that have to be taken into consideration. Previously, it held 25-30% of worldwide shares, which performed a job in boosting efficiency. Attributable to RBI restrictions on investing in worldwide shares, this publicity has dropped to about 10%. This side is certainly a “previous efficiency is not going to be repeated sooner or later” consideration.
Now let’s get to it.
Parag Parikh Flexi Cap Fund’s historic market cap allocation
That is solely with repect to Indian fairness holdings. The “others” characterize each money and worldwide fairness holdings. The siginificant discount of mid cap and small cap holdings might be a very powerful indicator we’ve got of the impression of the fund’s rising AUM.
Nonetheless, this isn’t an ideal indicator. The money/bond holdings (see under) can be utilized to purchase mid and small caps in future. Solely time will inform how a lot a “flexicap” the fund might be.
An important indicator that AUM has not affected the fund managers potential to churn is proven under.
Parag Parikh Flexi Cap Fund’s historic AUM progress and portfolio turnover ratio
There is no such thing as a correlation between the 2. That is an incomplete distinction to our earlier research: Kotak Flexicap Mutual Fund Evaluation: Is AUM affecting its efficiency?
The one beneficial side of the fund administration model is its low portfolio churn ratio. Many funds churn fairly a bit when the AUM is low, and develop an increasing number of sedate as the scale grows. That has not been the case for Parag Parikh Flexi Cap Fund.
Month-to-month % Change in AUM minus % change in NAV
AUM enhance is because of (1) Capital achieve and (2) Influx. To get an approximate sense of the influx, we plot the distinction between the AUM share change and NAV share change.
This means, leaving apart the pre-pandemic surge in reputation, that the inflows within the final couple of years have been regular. That is good for each the fund’s current traders and the fund administration. Sudden will increase in influx may be fairly problematic. A gradual inflow is far more manageable. That appears to be the case not too long ago.
Parag Parikh Flexi Cap Fund’s historic Home Equities, Money & Money Equivalents and Abroad Fairness holdings, together with its portfolio turnover ratio
The abroad fairness drop and the gradual enhance in money/bond holdings are a very powerful latest adjustments, though they don’t appear to correlate 1-to-1 with the portfolio turnover ratio.
Efficiency evaluation of Parag Parikh Flexi Cap Fund
According to our earlier research, rolling return graphs don’t correlate with AUM hikes. Please take into account that the discover remains to be fairly younger. As you enhance the rolling return period, the variety of knowledge factors and the time window within the horizontal axis will come down. These graphs have been created with the MF Analyser device, which is a part of the freefincal investor circle.
3Y rolling returns: The fund has managed to maintain its nostril above the benchmark, however there is no such thing as a correlation with the AUM
5Y rolling returns: Once more, not a lot correlation with AUM. The latest drop in outperformance could possibly be because of the money holding and decrease publicity to mid and small cap shares.
7Y rolling returns: Doesn’t imply a lot, little or no knowledge.
We supply the next knowledge from our month-to-month lively mutual fund efficiency screener.
1 Rolling return outperformance consistency: the fund returns are in contrast with class benchmark returns over each doable 3Y,4Y, 5Y interval. The upper the outperformance consistency, the higher. Suppose 876 fund returns have been in contrast with 876 benchmark returns, and the fund has crushed the benchmark 675 occasions. The consistency rating might be 675/876 ~ 77%.
2 Upside efficiency consistency over each doable 1Y,2Y,3Y,4Y, 5Y: Larger the higher. A rating of 70% means, 7 out of 10 occasions, the Fund carried out higher than the class benchmark when the benchmark elevated. This can be a measure of reward. It’s computed from rolling upside seize knowledge (see hyperlink under). Most funds that beat the index persistently wouldn’t have constant upside. See: Unusual, however true! How mutual funds beat the index!
3 Draw back efficiency consistency over each doable 1Y, 2Y, 3Y,4Y, and 5Y. The upper, the higher. A rating of 60% means 6 out of 10 occasions, the Fund carried out higher than the class benchmark when the benchmark was transferring down. This can be a measure of threat safety. It’s computed from rolling draw back seize knowledge. Learn extra: An introduction to Draw back and Upside Seize Ratios.
Draw back safety issues greater than upside efficiency!
| Metric | N200TRI | NIFTY 500 Multicap 50:25:25 TRI | Nifty Largemidcap 250 TRI |
| No of rolling return entries Index (1 12 months) | 2696 | 2708 | 2708 |
| No of rolling return entries Fund (1 yr) | 2696 | 2708 | 2708 |
| No of occasions fund has outperformed index (1 yr) | 2090 | 1525 | 1523 |
| rolling return outperformance Consistency Rating (1 yr) | 78% | 56% | 56% |
| upside efficiency consistency (1 yr) | 13% | 10% | 13% |
| draw back safety consistency (1 yr) | 93% | 98% | 93% |
| No of rolling return entries Index (2 Years) | 2454 | 2466 | 2466 |
| No of rolling return entries Fund (2 years) | 2454 | 2466 | 2466 |
| No of occasions fund has outperformed index (2 years) | 2141 | 1514 | 1498 |
| rolling return outperformance Consistency Rating (2 years) | 87% | 61% | 61% |
| upside efficiency consistency (2 years) | 7% | 0% | 6% |
| draw back safety consistency (2 years) | 100% | 100% | 100% |
| No of rolling return entries Index (3 Years) | 2207 | 2220 | 2219 |
| No of rolling return entries Fund (3 years) | 2207 | 2220 | 2219 |
| No of occasions fund has outperformed index (3 years) | 2067 | 1421 | 1346 |
| rolling return outperformance Consistency Rating (3 years) | 94% | 64% | 61% |
| upside efficiency consistency (3 years) | 1% | 0% | 0% |
| draw back safety consistency (3 years) | 100% | 100% | 100% |
| No of rolling return entries Index (4 Years) | 1959 | 1972 | 1971 |
| No of rolling return entries Fund (4 years) | 1959 | 1972 | 1971 |
| No of occasions fund has outperformed index (4 years) | 1925 | 1551 | 1533 |
| rolling return outperformance Consistency Rating (4 years) | 98% | 79% | 78% |
| upside efficiency consistency (4 years) | 0% | 0% | 0% |
| draw back safety consistency (4 years) | 100% | 100% | 100% |
| No of rolling return entries Index (5 Years) | 1711 | 1723 | 1723 |
| No of rolling return entries Fund (5 years) | 1711 | 1723 | 1723 |
| No of occasions fund has outperformed index (5 years) | 1711 | 1622 | 1554 |
| rolling return outperformance Consistency Rating (5 years) | 100% | 94% | 90% |
| upside efficiency consistency (5 years) | 0% | 0% | 0% |
| draw back safety consistency (5 years) | 100% | 100% | 100% |
That’s fairly first rate.
On the time of writing, there is no such thing as a main slip in efficiency because of the massive AUM. There is no such thing as a correlation between the AUM enhance and portfolio churn. The mid and small cap allocations have decreased considerably. We can’t say if that is tactical or due to the AUM.
Subsequently, no proof (so far as my pondering takes me) exhibits that dimension has affected the fund’s efficiency. That stated, the fund has had a stellar run since inception (I’m an NFO investor. See – Auditing my retirement portfolio for Mint Newspapers Guru Portfolio).
Such an prolonged successful streak might not final. Nobody is above the regulation of averages. Subsequently, one mustn’t succumb to the new hand fallacy and assume previous efficiency might be repeated sooner or later.
The fund overrelies on its fund supervisor, Rajeev Thakkar, which is harmful. Whereas current traders can proceed to carry and make investments additional within the fund so long as efficiency is passable, we propose new traders train warning and average expectations. We consider they’re higher off with index funds.
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