Risk & Return Analysis of Parag Parikh Flexi Cap Fund

Parag Parikh Flexi Cap Fund (PPFAF), a open ended dynamic equity scheme by Asset Management Company : PPFAS Asset Management Private Limited, investing across Large cap, Mid cap and Small cap stocks with a minimum of 65% in Indian equities and up to 35% in overseas equities and domestic debt instruments.

Objective : Investment Objective of the scheme is to seek to generate long term capital growth from an actively managed portfolio primarily of Equity and Equity related securities.

Financial Instruments covered under Scheme :
1. Indian Equities
2.Foreign Equities or related instruments
3.Debt Securities

Portfolio Return (%) since inception (Lumpsum Investment Performance (Compounded annual returns)

Portfolio (July 2025) : –

Riskiness of the Portfolio

Risk Adjusted Metrics

1. Sharpe Ratio

The Sharpe ratio measures excess return per unit of total risk (Standard Deviation)

Formula =  (Rp-Rf)/ SD

Where Rp = Portfolio return

Rf= Risk Free Rate

SD = Standard Deviation

Rp (10 year Direct Plan) = 18.26%

Rf = 6.41% (RBI 10 Year Govt Bond)

SD = 8.75% (as per Factsheet)

Sharpe Ratio = (18.26-6.41)/8.75 = 1.35

Ref : https://rbi.org.in/Scripts/BS_NSDPDisplay.aspx?param=4             

• Treynor Ratio

The Treynor ratio measures excess return per unit of systematic risk (beta)

Formula =  (Rp-Rf)/Beta

Rp (10-year Direct Plan) = 18.26%

Rf = 6.41% (RBI 10 Year Govt Bond)

Beta = 0.57 (as per Factsheet)

Treynor Ratio = (18.26-6.41)/.57 = 20.79%

• Jensen Alpha

The Treynor ratio measures excess return over the expected return based on CAPM

Jensen’s Alpha = Rp- [Rf+Beta x (Rm-Rf)

Rp (10-year Direct Plan) = 18.26%

Rf = 6.41% (RBI 10 Year Govt Bond)

Beta = 0.57 (as per Factsheet)

Market Risk Premium = 7.26% (As per Aswath Damodaran)

Ref : https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html             

Jensen Alpha = 18.26% – [6.41% +.57 x 7.26%] = 7.712 %

 Deep Dive Analysis             

• Strong risk-adjusted returns: Sharpe and Jensen’s Alpha both signal that the fund consistently generates excess return relative to its risk, a big plus for institutional investors who value measured volatility.
• Defensive equity characteristics: Beta at 0.57 and standard deviation around 10% suggest the fund is designed to deliver smoother return profiles, softening drawdowns during downtimes.
• Disciplined portfolio action: Low turnover, yet high tracking error, suggests the managers are willing to make selective, high-conviction bets, while retaining a core, value-driven essence.
• Active manager value-add: High Jensen’s Alpha and Treynor ratio collectively demonstrate that the team is earning their keep, not just from market returns but by strategically selecting stocks that outperform.
• Global diversification: The international weight lifts return potential but comes with currency exposure that needs monitoring, especially when the rupee strengthens.

1. Core Equity (India) – 67%

Top Holdings & Risks:

Large Banking Sector Stock Holding – HDFC Bank (8.1%), ICICI (4.9%), Kotak (4.0%), Axis (3.1%)

• Risk: Banking sector concentration — sensitive to interest rate cycles, asset quality, and regulatory changes.
• Mitigation: Diversified across top private banks reduces idiosyncratic risk.
• Coal India (6.0%)
  • Risk: Commodity price swings and policy shifts (e.g., decarbonization).
  • Mitigation: Strong dividend yield and cash-rich PSU status offer stability.
• Power Grid (5.8%)
  • Risk: Interest rate sensitivity due to regulated returns.
  • Mitigation: Low earnings volatility makes it a defensive play.
• ITC (4.4%)
  • Risk: Regulatory and excise risks in tobacco segment.
  • Mitigation: FMCG cash flows provide cushion during market drawdowns.
• Auto (Maruti 3.6%, M&M 3.5%)
  • Risk:  Cyclical demand and input cost volatility.
  • Mitigation: Market leadership and product diversification.
• IT Services (HCL 2.9%, Infosys 1.4%)
  • Risk: Global tech spending and currency exposure.
  • Mitigation: Stable margins and predictable cash flows.

Portfolio Characteristic:

• Balanced mix of cyclicals (banks, autos, commodities) and defensives (FMCG, utilities).
• Beta: 0.57 – lower than market, indicating reduced volatility.

2. Overseas Equity  – 10.9%

Top Holdings: Meta, Alphabet, Microsoft, Amazon

• Risk: High concentration in large-cap US tech; valuation sensitivity.
• Mitigation: Strong cash flows and secular growth trends.

Currency Exposure:

• USD exposure is mostly unhedged now.
  • Benefit: Gains when INR weakens.
  • Risk: Losses when INR strengthens.

3. Arbitrage & Special Situations – Low Single Digits

• Includes hedged positions in Reliance, Bajaj Finance, TCS, L&T.
• Purpose: Market-neutral strategies to capture carry or event-driven gains.
• Benefit: Helps reduce overall portfolio volatility.

 4. Debt & Cash  – 10-21% (Variable)

• Invested in A1+ CDs, T-Bills, TREPS
• Risk: Reinvestment rate risk.
• Benefit: High liquidity and low credit risk, acts as a buffer during market stress.

 Overall Assessment

• Risk Profile: Moderately conservative with a tilt toward quality and resilience.
• Return Potential: Strong long-term compounding through a mix of domestic cyclicals, global tech, and defensive buffers.
• Volatility Management: Achieved via diversification, arbitrage sleeve, and cash reserves.

Vikalp Saini