In case of more than one flexi cap funds, how to ensure portfolio exposure is not the same? Trideep Bhattacharya answers

26% of your exposure goes out to financial services. You have HDFC Bank and ICICI Bank in the first five. Are you more bullish on private banking?
Trideep Bhattacharya: If you subdivide financial space into three or four parts, one is basically non-banking financial companies (NBFCs), private sector banks, public sector banks and insurance and capital markets. Within all of the spectrum which we have now to invest within financial services, we are particularly positive on NBFCs, insurance, capital markets, and then private banks. We have been overweight on PSU or PSU banks for a good while, but we have taken profits and moved on more to private banks in that context. If you look at our key overweight, they would probably be within financials, NBFCs and capital markets.

Let us focus lightly on the midcap category and because you also look after the midcap fund for your fund house. You mentioned being selective as far as midcaps are concerned. What specific sectors are we talking about and what kind of valuations are comfortable then?
Trideep Bhattacharya: In midcaps, the framework that we use is to make sure that earnings growth is concomitant with the valuations that we pay. Hence, we have to deep dive and do specific analysis on sub-sectors within which we find this equation to sort of hold true overall. We find such a situation holds true in select consumer-focused consumer durables and rural exposed consumer names. We also find companies exposed within the power theme, particularly in the midcap space, which relatively are better positioned and IT services where the midcaps have better growth profile than other segments. This, of course, is just a sub-segment of various other stocks that we like.

Our midcap strategy is a lot more bottom-up, company-focused rather than just sectors, but those would be three or four areas where we are still finding value as compared to many others. The final area that I would point to is selecting PSUs within defence. Now, this is one area, defence where we clearly see that the earnings outlook is robust, but some of the private sector companies are quoting at very high valuations. So, this is one spot where we have been more selective and focused on select PSUs who have developed meaningful expertise in this area and have been operating for more than half a century in this area and we still find the valuation equation in favour of them.

Talking about having more exposure or the portfolio exposure towards largecaps, why would one want to consider a flexi cap instead of a passive largecap? It is all about giving stability to your portfolio and at the same time expecting a run-up in the largecaps. Why cannot one go for a passive largecap or one one go for a passive largecap, but then to have a certain kind of select midcap and smallcap, which also gives you a good risk-reward ratio, one might want to consider a flexi cap with a heavier or a largecap bias in it?
Trideep Bhattacharya: As opposed to a pure largecap fund whether it is active or passive, the point that I would like to make here is that valuation anomalies, given the flow equation, gets corrected sooner than what most people anticipate. For instance, some of the very high-profile, high-valuation defence names or capital-goods names which were quoting very high valuations over the last month or two have corrected more than 20% to 30%, even though the broader market has not corrected.

For an average investor to spot these changes and act accordingly and change from one fund to that of another is a very tedious exercise. Hence, in that context, if you have a fund, like let us say a flexi cap fund, which has a certain exposure to largecaps, keeping in mind the safety, let us say 70%, like we have in our case and 30% in mid and smallcaps, as and when the valuation corrects, we can quickly make the change within the fund without incurring too much of transaction costs, but at the same time, kind of capturing the valuation changes that happen as a result of market move. This is only possible if under the single fund umbrella, a fund manager has a leeway to make that change and that is the reason a flexi cap fund where one can operate across market caps without any regulatory limits, particularly in the current market scenario.Talking about the cash component in your flexi cap fund, what is the current status?
Trideep Bhattacharya: Our cash component structurally is actually on the lower side. We have about close to 3% cash, but one has to keep in mind that as a specific fund house, we have taken the view that we will not hold cash. Cash, in our opinion, in terms of timing the markets, particularly in and around big moves, is extremely tough to do so. Hence, we feel that it is better, particularly in the context of the medium term in the next three to five years where we expect India to report resilient earnings growth, it is better to stay invested.

In fact, it is better to balance the conservatism via shifting around market cap, i.e., between largecap, mid, and smallcap as opposed to keeping the money in cash. So, we have played the conservatism via our large, mid, and small mix as opposed to holding larger cash or lesser cash at different points in time and cycle. But to answer the long question in short, we currently have close to 3% cash in our flexi cap funds.

How many flexi caps can one have? Even if one wants to have more than one flexi cap, what is the kind of exposure in that particular fund one must look at because diversification is a very important aspect in your portfolio that you might want to consider. How can one make sure that even if you are having more than one flexi cap, the portfolio exposure is not the same?
Trideep Bhattacharya: It is a difficult question to sum up because you are asking me effectively to comment on competitors. But there are two or three parameters that people should keep in mind while choosing a fund, particularly a flexi cap fund. The first thing is basically the risk appetite of the consumer. Here, we are talking about relatively more conservative consumers who want to, for sure, play the equity markets, but at the same time, want to have lower volatility as compared to kind of a mid or smallcap category. That is the first thing.

In that case, they should sit with their advisors to take a view where they stand and invest accordingly. Second, within the various flexi caps that are there, it is important to have a reasonable mix of funds if there are more than one, where the large, mid, and small mixes are quite different.

If one were to keep that in mind, then even if they have multiple ones, the overlaps would be relatively smaller, so to speak. So, maybe one largecap oriented flexi cap could be complemented with another more mid or smallcap oriented flexi cap fund or maybe a multi-cap fund as the advisors suggest. These would be two or three things that I would highlight on a broad-based basis on your channel. Of the rest, I leave it to the advisor to do the needful and advise the right fund for the right customer.