Why is Parag Parikh Flexi Cap Fund still a top recommendation despite underperformance? Expert explains

Mutual fund performance often goes through cycles, with even well-established schemes experiencing periods of underperformance. While recent returns may attract attention, they do not always reflect a fund’s long-term potential. Evaluating a fund over a longer time horizon can provide a more meaningful picture of its overall performance.

A similar query came up during The Money Show on ET Now, where the host pointed out that Parag Parikh Flexi Cap Fund has recently underperformed several peers in the flexi-cap category, with many other funds beating their benchmarks. So why do advisors continue to recommend it?

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Aditya Shah, Founder, Hercules Advisors explained why he believes investors should focus on long-term consistency rather than chasing short-term performance.

Shah said that the outperformance and underperformance are part of every mutual fund’s investment cycle, and no single fund can consistently outperform every year over a period of time. He said investors should avoid judging a scheme solely based on its recent returns and instead look at its performance over a longer period.

“What matters more is the risk-adjusted return,” Shah said. He noted that Parag Parikh Flexi Cap Fund has consistently ranked among the top two or three funds on a risk-adjusted basis and is likely to remain in the top quartile over a five- to ten-year period.

“Over a period of 5 to 10 years, Parag Parikh will be in the top five quartile and that is all that an investor really needs,” the expert said.He explained that every year, you cannot get a fund that is outperforming. Funds go through phases of outperformance and underperformance.

Shah also highlighted the fund’s large-cap bias as one of the key reasons behind his recommendation. According to him, investors with an investment horizon of around five years should prioritise controlling risk rather than chasing high returns from riskier segments of the market.

He said portfolios with a greater allocation to large-cap and mid-cap stocks tend to offer a better balance between risk and return over shorter investment horizons, whereas small-cap funds can be significantly more volatile.

According to the expert, “Over a period of five years, you cannot go into the market into the smallcap side of the market. You have to assume an orientation of a largecap and a midcap side of the market because a smallcap fund will have a higher risk.”

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He further pointed out that despite their strong performance in earlier years, small-cap funds have struggled recently, demonstrating why investors should not assume that past winners will continue to outperform.

According to Shah, risk management should take precedence over return maximisation when the investment horizon is relatively short. Instead of chasing the best-performing fund every year, investors should remain invested in schemes with a consistent long-term track record and strong risk-adjusted performance.

The expert said that one should evaluate funds over complete market cycles rather than based on short-term returns. A temporary phase of underperformance does not necessarily make a fund a poor investment if it continues to deliver competitive long-term, risk-adjusted returns while keeping portfolio risk under control.

As per the data available on ACE MF, in the last six months, the fund lost 4.94% compared to a loss of 2.99% by the benchmark (Nifty 500 – TRI). In the last one year, the fund delivered a negative return of 2.43% against a marginal loss of 0.26% by the benchmark.

After delivering positive returns in the last three months, the fund failed to outperform its benchmark. The fund delivered a return of 4.87% against a return of 11.48% by the benchmark.

Over the longer horizon, the fund has delivered a return of 14.24% in the last three years against a return of 13.33% by the benchmark. In the last five years, the fund delivered a return of 13.85% compared to 12.62% by the benchmark and since its inception, the fund has delivered a CAGR of 17.50%.

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The database platform ACE MF further showed that on a monthly basis, the fund delivered best returns between March 24, 2020 to April 24, 2020 where it delivered 18.63% return against 17.74% by the benchmark. And the worst performance was between February 24, 2020 to March 23, 2020 where it lost 30.98% and the benchmark lost 37.16% in the same period.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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