Flexicap Fund is an interesting proposition for long-term investors: Rajat Chandak

While the market valuation is rich, the outlook on earnings growth remains positive.

Among the various equity mutual fund categories, flexicap is the most flexible which allows the corpus to be deployed across large, mid and small caps based on the relative attractiveness of these individual pockets. The large cap exposure provides defence during turbulence times, while mid and small caps help in generating better returns over the long term. The balance between the risk and reward makes it a very reasonable investment avenue for equity investing, says Rajat Chandak, Senior Fund Manager, ICICI Prudential AMC.

In an exclusive interview with Sanjeev Sinha of FE Online, Chandak shares his views on the stock markets and their newly-launched Flexicap Fund. Excerpts:

The Indian stock markets have been largely resilient thus far. Do you see this trend continuing?

The Indian markets in line with the global markets have been supported by liquidity unleashed by the global central banks. This coupled with nearly zero cost of capital in most parts of the world has played a big role in ensuring that equity markets remain resilient. From a business cycle perspective, the Indian markets remain attractive as corporates have deleveraged, capex cycle is yet to revive, and both credit growth and profit to GDP ratio is low. So, compared to global business cycle, the risk of business cycle contraction in India is very low. However, equity valuation is no longer inexpensive as it was in March 2020.

ICICI Prudential has launched the ICICI Prudential Flexicap Fund. Why do you think this category is relevant in the current market environment?

Among the various equity mutual fund categories, flexicap is the most flexible which allows the corpus to be deployed across large, mid and small caps based on the relative attractiveness of these individual pockets. The large cap exposure provides defence during turbulence times, while mid and small caps help in generating better returns over the long term. The balance between the risk and reward makes it a very reasonable investment avenue for equity investing. Given this framework, we believe flexicap is an interesting proposition for a long-term investor.

How is IPRU Flexicap different from the other funds in this category?

The differentiation factor in case of the ICICI Prudential Flexicap Fund is the model-based approach when it comes to deciding on allocation to various market capitalisations. The scheme will be relying on an in-house market-cap model and other economic indicators. This model will be relied upon for portfolio re-balancing as well.

This model comprises of parameters such as market cap weight as a percentage of total market cap, valuation differential of midcap and small cap over large cap and Relative Strength Index (RSI). RSI gauges whether the particular market cap is in overbought or oversold zone. The fund manager would further look into the business cycle or macro-economic indicators to fine-tune the model allocation.

If the market continues to remain elevated, what would be the portfolio like for this fund?

While the market valuation is rich, the outlook on earnings growth remains positive. The deployment phase will be gradual in nature and more importantly will be done judiciously by selecting sectors and stocks where we see opportunities for reasonable risk-adjusted return from a medium to long-term timeframe.

What are some of the key risks that can derail the current rally?

Rising inflation is one of the risk factors to be mindful of. Historically, while manageable inflation tends to be a positive for equities (supports nominal growth in GDP and earnings), it could also lead to higher interest rates which could derail the pace of economic recovery. Currently, most of the global central banks seem to be taking higher inflation levels in their stride. The other significant risk is how the pandemic is likely to pan out. Given a significant portion of the population is likely to be vaccinated, the disruption potential appears to be muted.

Which sectors are you over and underweight on?

We believe there is potential across various sectors, on a bottom up basis, to deliver good earnings growth. We see opportunities particularly in large private banking space, automotive industry, retail, construction and telecom.

When it comes to sectors which are expensive, FMCG (consumer staples) is one such sector. Technology is another pocket which has undergone a re-rating over the past 15 months.