Mutual Funds

How ICICI Pru Flexicap NFO is different

Kumar Shankar Roy BL Research Bureau | Updated on July 04, 2021

The fund aims to invest across the spectrum based on a market cap allocation model

ICICI Prudential MF has launched its flexicap equity fund. The new fund offer closes on July 12, 2021. With the latest addition, the number of funds in this crowded category has gone up to over two dozen. A flexicap equity fund, arguably, enjoys the most unconstrained investment mandate among peers. It has the flexibility to move across large-, mid- and small-caps without any restriction. Thus, it may do well across different market cycles given the dynamic nature of the scheme, if the decisions to navigate across market capitalisation are planned and executed well.

To make its mcap allocations process-driven, ICICI Pru Flexicap aims to identify and invest in opportunities across market caps through an in-house marketcap model. It will deploy a mix of top-down and bottom-up approach to identify opportunities. Stocks, from an initial universe of S&P BSE 500, will be selected basis various factors — such as macros, company fundamentals, valuations, etc. The mcap allocation will be assessed and re-balanced on a periodic basis, based on the in-house model, which takes parameters such as mid- and small-cap weight as a percentage of total mcap of the universe, market valuation, relative strength index differential and various macro-economic indicators.

Mcap allocation

According to ACE MF data, flexicap funds, on an average, have 70 per cent large-caps, 18 per cent mid-caps, 7 per cent small-caps and 5 per cent in others (cash). Large-caps help in limiting downside and providing liquidity to the portfolio. This was seen in March 2020 when flexicap funds increased large-cap allocation to over 75 per cent on average to shield against volatility. On the other hand, mid- and small-caps are better positioned to capture potential upside from expected economic recovery, as seen in the flexicap category hiking exposure to 25 per cent in May 2021 from 18-19 per cent in March 2020.

ICICI Pru Flexicap has a market cap allocation plan of 50-100 per cent for large-caps and 0-50 per cent for mid- and small-caps. But as per its model, the fund may start with 75-80 per cent in large-caps and the rest in mid- and small-caps. This is because stock market valuations are no longer cheap, and mid-cap index (up 113 per cent) and small-cap index (up 166 per cent) have had a stronger run-up from March 2020 Covid lows compared to large-cap index (up 78 per cent). Frothy valuation pockets exist more in the mid-caps (trailing PE of 43 times) and small-caps (52 times), hence staggered exposure could be better for them.

Of course, the risk of under-performance remains if mid- and small-caps continue to outperform even if large-caps (PE of 32 times) seem relatively cheaper. Certain funds such as PGIM India Flexi Cap and BOI AXA Flexi Cap have higher allocation to mid- and small-caps.

Flexi or multi?

From a risk-reward perspective, flexicap funds fall in the middle of the diversified space (moderate) compared to multicap funds, which may seem similar but are not. Flexicap funds offer low potential risks relative to investing more in mid- and small-caps. In September 2020, SEBI had revised the investment mandate of multicap funds, requiring them to invest at least 25 per cent of their assets each in large, mid and small-caps. So under the multi-cap category, at any point in time, minimum of 50 per cent is invested in the mid- and small-cap category, which may pose risk during times of volatility and market corrections. Funds that did not wish to follow the new investment strategy converted into a flexicap fund, a new category introduced by the regulator in November 2020. This, incidentally, is the second largest category amongst equity schemes today.

ICICI Pru has a multicap fund of its own, which has 41 per cent in large-caps while a majority (57 per cent) is in mid-caps and small-caps. This is in line with the peer multicap fund category allocation break-up. Thus, the new flexicap fund offers higher large-cap exposur i.e. aka more perceived safety at all times. ICICI Pru Flexicap Fund is labelled ‘very high risk’ under the SEBI risk-o-meter. You can invest a minimum of ₹5,000 and in multiples of ₹1 thereafter.

Of the over two dozen funds in the flexicap fund category, Kotak Flexicap is the largest, followed by HDFC Flexi Cap, UTI Flexi Cap and ABSL Flexi Cap. The fund category has generated latest one-, three- and five-year returns of 54.5 per cent, 14.1 per cent CAGR and 14.2 per cent CAGR, respectively. Funds with a demonstrable track record should be given priority by new investors.

Fundas

ICICI Pru Flexicap will select stocks from an initial universe of S&P BSE 500

Stock selection will be based on factors such as macros, company fundamentals, valuations

The mcap allocation will be assessed and re-balanced on a periodic basis

Published on July 03, 2021

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