Mutual Funds

Why investors can consider DSP Flexi Cap

Yoganand D BL Research Bureau | Updated on August 21, 2021

This seasoned fund has contained downsides well and enjoys a flexible investment mandate

Investors with a moderate risk appetite who prefer the stability of large-caps with a dollop of mid- and small-caps in a single equity portfolio can consider DSP Flexi Cap (erstwhile DSP Equity). The scheme can be part of investors’ core portfolio, in view of the fund’s seasoned track record of over 24 years, steady performance and management of downsides.

The previously multi-cap fund became a flexi-cap scheme with effect from January 2021. A flexicap structure, arguably, enjoys the most unconstrained investment mandate among peers given the freedom to move across large-, mid- and small-caps without restriction. DSP Flexi Cap’s broader investment strategy fits well with this, as it aims to seek out profit opportunities while remaining market-cap agnostic.

Performance

Over the last few years, large-caps have anchored the fund’s portfolio with allocation ranging 57-75 per cent. The fund uses mid-caps (currently 29 per cent) and small-caps (13 per cent) exposure to add zing to returns, while loading up on cash (7-9 per cent) during volatile/bearish market conditions such as March/April 2020 and October 2018.

This, along with its predisposition towards large-caps, helped the scheme contain downside during downturns in years such as 2008, 2011 and 2015.

However, this defensive attribute has not meant the fund will not do well in bull markets. For example, the fund outperformed in the bull market of 2017.

During the market fall in March 2020, the fund’s equity holdings were only at around 93 per cent, and remained in that range until May and hence it partly missed the initial leg of the rally. But since then it has recovered lost ground. The fund has beaten its benchmark i.e. Nifty 500 TRI, as also bettered the category average over 1-, 3-, 5- and 10-year periods ended August 17, 2021.

DSP Flexi Cap has not given negative returns for five years or more in terms of rolling returns on a daily basis since inception. In the last three years (monthly basis), it has managed downsides well and also captured upsides. A Downside Capture Ratio of 93 per cent (below 100 per cent) implies it has fallen less during periods when the benchmark index fell.

The scheme has also captured more of the upside (Upside Capture Ratio of 103 per cent) during times when the index rose.

Portfolio

The fund’s investment philosophy is to buy quality businesses and remain invested for the long term with a bottom-up approach. It uses market corrections to add to quality business at lower prices.

It builds the portfolio on core and tactical approach in which the core portfolio is constructed on long-term themes. The fund’s allocation to mid-caps and small-caps is higher than flexicap category, which gives it a more pro-cyclical tilt.

Of the total allocation, core portfolio is in the 75-80 per cent range while the tactical portfolio is in the band of 20-25 per cent. DSP Flexi Cap usually holds a portfolio of 50-60 stocks. At present, its top five stocks account for 27 per cent weight.

The portfolio is growth-oriented, with a price to earnings of nearly 52 times, which is higher than that of larger peers such as Kotak Flexicap and HDFC Flexi Cap.

Since 2016, the fund has increased and has significant exposure in the financials, healthcare and materials sector. Given the financials are top sector choice, the fund has bet on better-placed companies such as ICICI Bank, HDFC Bank, Bajaj Finance, Bajaj Finserv and Axis Bank. The combined allocation to top three sectors i.e. financials, construction and technology, is 49.6 per cent. Key stock holdings include ICICI Bank, HDFC Bank, Infosys and Ultratech Cement.

When compared with the flexi cap category, the fund is overweight financials, construction, automobile and chemicals. On the other hand, it is underweight technology, healthcare, energy and metals.

Published on August 21, 2021

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