18 April 2013

PPFAS Long Term Value Fund - A niche fund in Indian Mutual Fund Space

Some time back, Parag Parikh’s PPFAS (Parag Parikh Financial Advisory Services) got the mutual fund license. This news got us excited. Why? Because Mr Parikh is a well respected figure in the Indian value investing landscape. And this would be the first time that a real value investor is launching a fund, where average investors like you and me can invest in a disciplined manner.

Now PPFAS MF has come out with a scheme named – PPFAS Long Term Value Fund. The approach this fund house is taking is quite different from other mutual fund houses. Unlike others, which generally start off with multiple schemes, PPFAS is starting with just one fund. Though it is too early to give any views on the fund or its possible future performance, I would like to share a few thoughts with you all.




What We Like

  • The fund is managed by those who have been mentored by a well respected value investor, i.e. Parag Parikh. So, as far as the management team is concerned, one can  stay rest assured of their caliber and integrity.
  • It has been highlighted all over the fund's website (link), that this scheme is suitable for investors who have investment horizon of minimum 5 years. We really liked this because when you are investing in accordance with value investing principles, you should be ready to wait and have patience. And 5 years give fund managers a decent time period to take rational calls regarding their decisions and not worry about pumping up NAVs on daily or weekly basis.
  • A section titled ‘We are different’ says that our investment choices are not dictated by glamorous factors such as momentum, technical analysis, algorithms etc. We prefer to stick to age-old metrics like cash flow, low debt etc. while constructing the portfolio. This is our circle of competence and we will never stray too far from it. This shows that fund is going to stick with time tested philosophy and is not trying to please anyone else.
  • The fund managers have decided to bar lumpsum investments during frothy times, i.e., when markets are overvalued. This clearly shows that the fund does not just aim to increase its AUM. It wants to make sure that people do not invest a lot when markets are going higher and higher. They want investors to be fearful when others are greedy.
  • The scheme now allows an investment in SIP mode for a minimum value of Rs 1000 per month. This has been reduced from an initial figure of Rs 5000, which would have acted as a deterrent for small investors.
  • A small 3 member team would be managing the fund and hence, decision making would be quicker and rationale. There is no cumbersome hierarchy like a lot of other fund houses where analysts would be ‘forced’ to come up with investment ideas on a regular basis, irrespective of the fact that whether the markets are overvalued or undervalued.
  • The fund does not have a ‘dividend payout or reinvestment’ option. It is a value fund and hence, there is just one ‘growth’ option. You need to give time to your money to grow. And that is what the fund is trying to achieve with this.
  • In Letter from the Chairman, Mr Parikh urges investors to consider the suitability of this scheme with their financial needs, goals, risk appetite and patience before investing. Now this is something which I have not seen anywhere else. Almost all fund managers' main aim is to increase their AUM and returns they give to shareholders. Nothing wrong with it. But here is one person who, from the onset, is cautioning investors to first see if the scheme matches with an investor’s personality or not.

What We Don’t Like

  • Scheme would invest a minimum of 65% in Indian stocks. Rest 35% would be invested in debt, money market instruments & foreign equities. Though diversification in important, we are not very sure as to how the foreign equities part would be managed considering the (little) experience that fund management team has in its dealings with foreign equities.
  • The site mentions that a part of the net assets may be invested in the Collateralised Borrowing & Lending Obligations (CBLO). Value investing and CBLO?? We are not very sure about this. Hopefully, these are not financial weapons of mass destruction (as told by Warren Buffett).

Edited to Add:

As told by Mr. Jayant Pai - "CBLOs (Collateralised Borrowing & Lending Obligations) are harmless instruments which are repo transactions recognised by RBI as an effective way of raising short-term finance. We will be on the other end of the deal as we will be lending to these RBI regulated entities - mostly banks on a short-term basis - say a week or so. This will be just a place to park our liquid money till we get an opportunity."


What Are We Doing?

With so many positives and really interesting differentiators, I must confess that I really do want to invest some of my personal money in this scheme. But, if we were to apply the very principles on which the fund is based, we would know that one should not let emotions govern investment related decisions. Sometime back, I had the opportunity to interact with Mr. Rajeev Thakkar (CEO & Fund Manager, PPFAS-MF). And I must say that I was delighted to listen to his views regarding the fund, its future plans and the premise on which it is built on. This all the more makes me feel like investing in this fund. Add to this the fact that Indian markets are trading at levels which are not very high, i.e. they are trading close to their historical means (link), it actually may be a good time to start an SIP in this fund.

But another point which we must understand is that this fund is based on value investing framework. This means that chances are that the fund would invest more in small & mid cap stocks rather than large caps. This indirectly means that in the short term, there are high chances of high volatility in NAVs due to the volatile nature of these small cap stocks.

So though there is no point in trying to predict the market direction, we would say that we may invest in this fund in near future, in case markets correct further and we are able to buy fund units at lower NAVs.


What Should You Do?

If you are already investing in established funds like HDFC Top 200, etc, then you can give this fund a try if you have money to spare. But if you have never invested in mutual funds before and are planning to invest in one, then this may not be good starting point for your investment journey. It is because this fund is for ultra long term investors who are capable of withstanding short term ups (or rather downs) of the market. Being a newbie in markets, it would be a tough ask for you to stay invested in the scheme, which invests in small and lesser known stocks, if it starts falling in hard times.

But, we are no one to give advice to you. It is your own hard earned money and it is your decision as to how you want to invest it. So take your call. For more details about this scheme (PPFAS-MF), do have a look at the site.

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5 comments:

  1. Your line "With so many positives and really interesting differentiators, I must confess that I really do want to invest some of my personal money in this scheme" really struck a chord with me:). I cant wait for this fund to come out so that I can start investing in it. It's sort of like waiting for the Reliance Power IPO ( which I didnt apply for ), but the difference here that this
    fund is going to be of some substance unlike you-know-who:)

    ReplyDelete
  2. @2ff086ba9bddf5dfd037a4bdbfbee0af:disqus

    You are right Nishanth. We re-read the post after publishing it and felt that after a very long time, we getting excited about something in stock markets. :)
    And this can be dangerous as it is a pure case of emotions taking over the decision making part of the brain. But yes, there is no doubt that fund has a lot of potential and may be a game changer in the industry.

    ReplyDelete
  3. Hey... about CBLO, as much as a complex term its sounds, CBLO in Indian markets is nothing but money markets investing for a short period of 1-2 days. It is used to park surplus funds on a daily basis between banks, MFs etc. Absolutely no worries on that count.. refer to http://bankingindiaupdate.com/cblo.htm

    So one negative down

    ReplyDelete
  4. We have added some more information about CBLOs in India as per our email conversation with Mr. Jayant Pai (PPFAS)

    ReplyDelete
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