PPLTEF has the flexibility to invest across all market capitalisations, across sectors, and across geographies
Sometimes, less is more. I believe this is true when one is selecting equity mutual funds to achieve their long term financial goals. A person does not require more than three equity mutual funds at any particular point in their life, in my opinion, to achieve their goals. This could be in any combination of funds across market capitalisation, across sectors or across geographies. But, there are hundreds of schemes to choose from! It thus becomes an extremely confusing task for the investor or even an adviser to sift through all these schemes and choose the right ones.
Secondly, most of the schemes have similar portfolios to each other, so there might not be that great an advantage of diversification. Thirdly, classification of the schemes can be misleading, as the underlying portfolio could be different from what the stated objective is.
All these factors contribute to the confusion for investors in choosing the right scheme. The confusion leads them to invest in multiple schemes for the sake of being 'safe'.
These are some of the reasons that we at PPFAS Mutual Fund have launched just one equity scheme-Parag Parikh Long Term Value Fund (PPLTVF). The main reason—we do not want to confuse investors. We believe that a person does not require more than 25 to 30 good ideas to be invested in to create wealth over the long term. Thus, a single scheme can suffice if one has the confidence and trust in the managers who are operating the fund.
As an analogy, take the case of a Swiss army knife. It is a multi functional gadget having various tools, such as differently sized knives, scissors, screwdriver, bottle opener and various other functions within a single device. Similarly, if a mutual fund scheme can take advantage of all market opportunities within a single scheme, then there is no need for multiple schemes.
For example, PPLTEF has the flexibility to invest across all market capitalisations (multicap), across sectors, and across geographies- domestic as well as foreign equities. In addition, the fund has the ability to participate in special situations such as buybacks as well as arbitrage opportunities. To be classified as an Indian equity mutual fund, the fund must be at least 65 per cent invested in Indian equities. With the remaining 35 per cent, the fund has the flexibility to invest in foreign equities and/or debt instruments. With the ability of the fund to partake in cash to futures arbitrage, the 65 per cent that needs to be invested in Indian equities (net long positions) can further come down. As you see, the fund manager has the flexibility, freedom and a wide mandate to invest in all market opportunities at any given time, within a single scheme.
Thus, the goal is to simplify life for the end investor and not to confuse them by providing a simple yet effective solution for their long-term financial goals.
Having said this, only if the end investor or adviser has complete trust with the managers of the scheme, faith in the investment process, belief in the funds' values and philosophy and confidence in the management that they will at all points uphold unit holders' interest, should they be invested in a single scheme. Else, with the help of a trusted financial planner or adviser, one can look at a couple of other schemes to diversify and round out their portfolios.
The original article could be seen here.