How PPFAS is marrying active with passive in its new Large Cap Fund

PPFAS Mutual Fund’s Parag Parikh Large Cap Fund aims to occupy a strategic middle ground between active and passive investing, offering broad exposure to India’s top 100 companies with disciplined “smart execution” and cost efficiency. Benchmarking to the Nifty 100 TRI, the fund prioritises index-aligned positioning while retaining limited opportunistic stock actions. The NFO closes on January 30.

Edited excerpts from a chat with Rajeev Thakkar, Chief Investment Officer and Director, PPFAS Mutual Fund:

What makes Parag Parikh Large Cap Fund unique enough to invest?

The top 100 companies in India are classified as Large Cap companies. Large Cap funds have this universe, and these companies are widely tracked. In this segment, many investors and advisors are choosing to go the passive route. We have attempted to provide a fund at an expense ratio that is around that of passive funds and at the same time take advantage of some active rules-based strategies that the fund can potentially benefit from.It is an active fund but managed in a passive style. Help us understand the mechanism of the active-passive style and how much would be the share of active stock picking in the overall portfolio?

The active share of the portfolio will depend on the opportunities prevailing in the market. There can be periods of very low active share and there can be periods where the active share is quite high. Overall, one should expect an active share of below 20% though there can be periods where it may briefly cross this.

The fund also looks for arbitrage opportunities in mergers and other special situations. How big and regular can such arbitrage opportunities be in the top 100 list of stocks?

These opportunities are lumpy in nature but relatively frequent. Mergers / demergers & spinoffs in the top 100 companies may be 2-3 in a year based on the recent past. Futures prices trading at discounts to the cash market also occur relatively frequently. The index is rebalanced twice a year which results in a few stocks being added to the index and a few stocks getting excluded.

With the 5 smart execution strategies, how much alpha can you make as compared to a Nifty Top 100 index fund?

Mutual funds are not guaranteed return products and are market linked. Regulations prohibit predicting future returns. However this scheme is not suitable for investors looking to generate returns that are substantially different from the underlying benchmark.

PPFAS Flexicap Fund has a very strong fan following and is also the largest equity scheme in India. What’s in it for your existing flexicap investors? Who should pair flexicap with largecap fund?

For investors looking to have a very active portfolio with some concentration in the best ideas and where there is flexibility to invest across market caps, Parag Parikh Flexicap Fund continues to be the choice. For investors looking to have a large cap exposure to the Indian equity markets at a low cost and where the portfolio is not too different from the underlying benchmark, the new fund Parag Parikh Large Cap Fund would be a relevant choice. Of course, many investors may choose to invest in both schemes in the proportion that is in alignment with their goals.

Will it follow the same value investing principle that PPFAS is known for?

Since this scheme will have a low active share, it will not be following the flexicap approach to investing.

For an investor who is looking to have largecap exposure, do you think Nifty50 is better or top 100 stocks? And why.

Globally, passive investing is about investing in a wide basket of securities. In the US for example, most passive investors would choose the S&P 500 index tracking funds. In India, traditionally, we have tracked BSE Sensex 30 and NSE Nifty 50. From a risk reduction perspective a Nifty 100 index will have more diversification as compared to Nifty 50.