As readers may be aware, other than existing SIPs, Parag Parikh Flexi Cap Fund is closed for subscriptions from Feb 1st 2022, to avoid breaching the overseas investment limit set by RBI. This restriction is for all mutual funds invested in foreign equity except ETFs. Many investors (who do not use SIPs) would like to know alternatives.
Initially, the MF industry was gung ho about getting the limits increased in a day or two! It has been a month, and there is no news on the matter. So it is time to move on.
Some considerations: Suppose RBI increases the limit, and the fund reopens. Depending on investor interest a similar situation of temporary closure may arise again. Based on how much the limit is increased and how soon, Parag Parikh AMC might rethink their foreign equity investment strategy. After all, the flexicap is their flagship fund and main profit source. They would not like prolonged or repeated disruption to their income.
The following considerations apply only to those manually investing in Parag Parikh Flexi Cap (PPFC)
Should I wait until PPFC re-opens? No. If you have money to invest, you should asap without waiting for any event. The investment should always be as per an asset allocation (equity: fixed income). However, no great damage will be done if you don’t invest in international stocks for some weeks or months.
PPFC is primarily an Indian equity fund, and therefore a replacement (in the portfolio) should also be an Indian equity fund. It makes little sense to choose a FOF investing in an overseas ETF. If the only reason you are investing in PPFC is for their foreign equity, then it is not a sound strategy.
Favourable taxation and automatic, tax-free asset rebalancing (bet Indian equity and foreign equity) are among the USPs of Indian equity funds holding international stocks. There is no need to give up on this aspiration unless RBI has other plans. We can cross that bridge when we get to it.
Is PPFC your only equity fund? For most people, the answer would be no.
If yes, PPFC is the only fund you hold; we suggest choosing one of the following options:
The reason is, either of these choices can be continued even after PPFC reopens for subscriptions. PPFC has a reasonably flexible investment strategy (for eg. It can act as an aggressive hybrid fund with up to 35% bonds if need be) and finding a close equivalent will be difficult. It is best not to try.
Note: I have started investing in UTI low volatility but this may or may not be suitable for you. See disclosure below for more details.
If PPFC is not only your only equity fund? Then we recommend investing in your other funds.
But what about the international equity exposure? No Earth-shattering difference will occur if you don’t invest in international equity for a few months. Maybe with all the rate hikes expected, it could be a blessing in disguise.
If RBI does not hike the limit for equity funds and only allows FOFs (fund of funds) investing in international ETFs what should be done? Such FOFs can be considered but please note, the most asset class you include your portfolio allegedly for “diversification” the tougher it will be to maintain it. Unless you let it grow like weeds fearing tax on rebalancing.
Even if the fund reopens, should we invest in PPFC? Its AUM has swelled up. This is an issue to think about. So far the fund has not seen a downtrend since launch and the law of averages may strike sooner than later. Again, we can cross that bridge when we get to it.
Disclosure: At the time of writing, PPFC is the highest holding in my retirement equity portfolio at about 58% (among MFs). HDFC Hybrid Equity comes in next at about 26% and Quantum Long Term Equity at 16%.
The investment closure came at a good time for me as I was getting greedy and chasing momentum in PPFC, ignoring concentration risk. I had the option to invest more in HDFC Hybrid Equity, but since UTI Low Volatility Index Fund (link points to review) came along, I have invested in this.
I like low volatility investing and have reasonable expectations about it. Also, I view it more as a replacement for Quantum Long Term Equity (which I shall shed gradually) than for PPFC.
So my plan is to invest in HDFC Hybrid Equity and UTI Low Vol. Even if PPFC reopens, I cannot invest too much in there. I shall exit QLTE in stages at future rebalances. Please note: My portfolio today is merely the residue of past investment mistakes. Please decide as per your own circumstances.
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About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice.
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