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A year after launch, Nippon India Passive Flexicap FoF changes course: Should you still invest?

As a long-term investor, you are better off investing in an actively managed equity fund

January 14, 2022 / 09:20 AM IST

Passive funds are getting a lot of attention from investors. And mutual fund houses are only too happy to oblige.

Actively-managed large-cap schemes have found it tough to beat indices over the past few years. So, a few mid-cap passive funds have been launched recently. Last year, the Nippon India Passive Flexicap Fund of Fund (FOF) or NFP was rolled out. This scheme just completed one year. It gave 35.09 percent returns, as against the category category average of 31.1 percent. Moneycontrol had recommended the scheme. Recently, the scheme changed its course a bit. Our recommendation therefore merits a re-look.

Passive allocation to market segments

NFP invests in a mix of passive schemes (exchange traded funds (ETF) and index funds) that offer exposure to large, mid and small cap stocks. The scheme invests in Nippon India ETF Nifty 100, Nippon India ETF Nifty Midcap 150 and Nippon India Nifty Small cap 250 Index Fund. Each month, it takes inputs from CRISIL about how the other flexi-cap (actively-managed) invested across large-cap, mid-cap and small-cap stocks. Based on an average allocation (weighted average), NFP will decide how much to allocate its own assets.

NFP allocates money to low cost ETFs or Index schemes offering exposure to large, mid and small cap and also benefits from the collective wisdom of all active mutual fund managers, he adds.

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What has changed?

When the scheme was launched SEBI had just carved out a new category of flexi-cap funds.

In the beginning, NFP followed the cues of multi-cap funds. But in the middle of 2021 NFP started following the asset allocation pattern of flexi-cap funds. That is why, in May 2021, NFP’s asset allocation shifted with more towards large-caps (66-70 percent). Around 19-22 percent of the portfolio got invested in mid-caps and the remaining went to small-cap stocks.

Arun Sundaresan, Head-Product Management, Nippon India Mutual Fund says that while that may have been the case of late, over time, flexi-cap funds (the earlier version of multi-cap funds) had reduced their large-cap exposure and taken on more of mid and small-caps. “NFP aims to bank on the collective wisdom of the industry to decide its own asset allocation and choose stocks and sectors passively, too,” adds Sundaresan.

The fund also gave an exit option last year once it changed it shifted its gaze on flexi-cap funds, instead of multi-cap schemes. At present, the scheme manages assets worth Rs 216 crore.

What should existing and new investors do?

Not everyone feels that passive investing is the future. Vijai Mantri, co-founder and Chief Investment Strategist, JRL Money says: “The debt taxation of this scheme brings down the post-tax returns. If you are a long-term investor, then you are better off investing in an actively managed equity fund.”

The scheme makes sense for those who invest directly. “Such investors who cannot pick MF schemes or don’t have a guiding hand, should find this scheme interesting,” says Vishal Dhawan, Founder and Chief Financial Planner, Plan Ahead Wealth Advisors. Sundaresan agrees and says that assets in NFP’s direct plan account for 27.7 percent of its total corpus, as opposed to the 10-12 percent typically seen in equity schemes.

Just expect moderate returns, warns Feroze Azeez, Deputy CEO, Anand Rathi Wealth, since this is a passive fund. If you wish to choose an actively-managed flexi-cap fund (these come be more volatile though), refer to MC30.

If you aren’t too finicky about the underlying market cap distribution so long as your fund invests in all three baskets, then stay invested in NFP.
Nikhil Walavalkar
first published: Jan 14, 2022 09:20 am

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