Do Flexi Cap Fund Managers Eat Their Own Cooking?

With assets of INR 5,532 bn, Flexi Cap continues to be the largest equity fund category in the Indian mutual fund industry. The appeal is obvious: Portfolio managers can invest in stocks from across the market cap spectrum, in an unrestrained manner.

The current environment—uncertainty coupled with volatility—is primed for Flexi Cap funds.

While investors have been busily investing in Flexi Cap funds, I thought it would be interesting to find out if portfolio managers share their enthusiasm.

Do portfolio managers invest in Flexi Cap funds they run?

When a portfolio manager invests substantial personal monies in funds he runs, he displays courage of conviction. It signals that the manager has faith in his investment skills, and that he is willing to take the same journey as investors in his funds.

For this analysis, I’ve considered the 10-largest Flexi Cap funds. Accounting for roughly 77% of the category’s assets, makes them a representative sample.

Some clarifications are in order:

1) To begin with, the disclosures only reveal the market value of investments made by portfolio managers, not the sums invested by them. To my mind, the latter is a far better indicator of the manager’s conviction.

2) Furthermore, the disclosures combine mandatory compensation-linked investments in the fund (as prescribed by market regulator SEBI) along with investments made by the portfolio manager on his own. This further muddles the picture.

3) Finally, the most recent disclosures are as of Sep. 2025.

The findings are interesting…

1) About 31% of the category’s assets have attracted investments less than INR 10 mn from portfolio managers

2) One-third of assets enjoy investments of over INR 100 mn, thanks to a single investment team.

3) There is little correlation between the fund’s asset size and portfolio managers’ investments therein

4) The long-standing industry myth that only managers from leading fund companies (read large AUM) invest meaningfully in funds they run, is shattered

5) Finally, when it comes to ‘skin in the game’, the portfolio management team at the helm of Parag Parikh Flexi Cap towers head and shoulders above its peers

I hope SEBI tweaks disclosure norms to make them more granular, whereby the sums invested by portfolio managers are unambiguously disclosed.

Globally, portfolio managers treat ‘skin in the game’ as a badge of honour. 

Hopefully, Indian portfolio managers will agree, and act in a like manner.

Investment Lessons We (Re)Learnt in 2025

In a sarcasm-laden comic strip by Scott Adams, Dogbert claims he can become a stock market expert by buying stocks, and then recommending them on TV. When Dilbert questions him about ‘fundamentals’, he retorts “It Doesn’t Get More Fundamental Than That”.

Several investors may believe that Dogbert was running equity markets in 2025. Truth be told, it wasn’t as bad a year, as it is being made out to be. What sets 2025 apart from the past few years is that volatility re-surfaced, and making money wasn’t as easy. Investors were reminded of some age-old investment lessons.

Here are five lessons, we relearnt in 2025:

1.     Expect the Unexpected

The year began with Indian equity markets experiencing volatility, thanks to stretched valuations. In April 2025, US President Trump imposed trade tariffs on several countries including India, leading to a sharp fall. Roughly a week later, Trump paused tariffs, and markets recovered.

When AI emerged as the buzzword, Indian equities were found wanting. As the year progressed, foreign portfolio investors busily sold Indian stocks. India emerged as the worst performing emerging market; the Indian rupee depreciated sharply versus the US dollar, further reducing market’s allure for global investors.

Some investors may believe they got the short end of the stick. But, that’s the nature of the beast. Investors must be willing to ‘expect the unexpected’ and have a stomach for volatility.

2.      Positive Macros May Not Move Markets

It’s not like only negative events played out in 2025. The macroeconomic environment had several positives to offer. The Union Budget raised tax-free income for citizens, GST rates were rationalised. The economy grew at a rapid pace (8.2%) in the second quarter of the financial year.

Inflation was benign for a better part of 2025. The central bank did its bit by slashing policy rates multiple times. To be fair, enough measures were put in place to boost economic growth, which in turn, should have played out positively for equity markets.

However, in the near-term, it isn’t uncommon for equity markets to stay immune to a positive economic environment. Hence being patient is crucial. At the risk of leaning on a cliché—time in the market, matters more than timing the market.

3.     Don’t Chase Returns

Small-cap stocks (and funds) delivered a strong showing in 2023 and 2024. However, 2025 was a different story. On a year-to-date basis, the typical Small-Cap fund has posted a loss of over 4%, and the Small Cap Index has shed over 5%. That should not have come as surprise, though.

It was no secret that valuations in the small-cap segment, had run ahead of valuations, making them expensively priced. Investors were driven by recent performance, and kept investing more, hoping for an encore.

Chasing performance is rarely a smart move. Rather, investors would do well to consider investment merit before making investment decisions.

4.     Diversification is the Key

In 2025, gold shone, and silver glittered even more. So far in 2025, the average Gold ETF has clocked a growth of 75%; the average Silver ETF has appreciated by roughly 136%. That’s a robust showing, considering that the Sensex is up by roughly 10%.

Unsurprisingly, as the year progressed, Gold and Silver ETFs (and funds), attracted substantial inflows. Diversification is one of the basic tenets of investing. It shouldn’t take a bull-run to convince investors of the merit of investing across assets classes. Investors should have had an allocation to commodities to begin with, in line with their risk-appetite and investment objectives.

Different asset classes will deliver at different points in time. The key is to always hold a diversified and well-rounded portfolio.

5.     Beware of Fund Companies’ Marketing Spiel

Fund companies will act in their interest, even if investor interest is compromised with. From Dec 2024 through Nov 2025, 33 Sectoral/Thematic funds were launched by fund companies. The category’s asset size rose by a whooping INR 655 bn, second only to Flexi Cap funds.

Truth be told, there is rarely a compelling reason for investing in a Sector/Thematic fund. The dominance of Sector/Thematic funds bears testimony to what aggressive marketing campaigns and an ‘incentivised’ ecosystem, can accomplish. Investors have been convinced of the merits of an untested fund from a category, that is largely suited for informed investors.

Investors must ignore the marketing spiel, and focus on funds (read: diversified) that will serve their interests. 

All the lessons listed above are time-tested. But markets have a way of reminding us, and ensuring that we relearn them, time and again.

What does 2026 have in store for us? I wish I knew!

As investors, what we can do is—be disciplined, adhere to the lessons learnt, and be a bit optimistic. Hopefully, a brighter future awaits.

Happy Investing!

#2025, #investing, #lessons, #markets, #mutualfunds

Of Lenskart, Mutual Funds, and Investing

Social media has emerged as an undeniable barometer of what’s occupying investor mindspace. Even a cursory participant like me, knows that Lenskart’s Initial Public Offering (IPO) is on everyone’s mind.

A tech-driven new age company, Lenskart is an eyewear retailer. It isn’t uncommon for IPOs of new age companies to be questioned for the robustness of their business models, ability to generate profits, and rationality of valuations. To that end, Lenskart is no different.

Perhaps, what caught everyone’s eye was the magnitude of lofty valuations; also, some comments made by the founder/CEO didn’t sit well with the investor community.

Unsurprisingly, there’s been a barrage of criticism on social media. I have never seen so many memes targeting an IPO 😊

Several leading Indian fund companies have invested in the IPO. Expectedly, they have also taken stick for their decision. Fund companies will have to justify to investors, what drove them to invest in the IPO.

This is where it gets interesting: Some have used the Lenskart IPO to slam the utility of mutual funds as investment vehicles. It has been insinuated that mutual funds are tools for compromising interests of retail investors.

The message is clear: Be way of mutual funds!

To my mind, that line of thought is both fallacious and uniformed.

Mutual funds enable retail investors to access markets, using the portfolio manager’s expertise. Indeed, the onus of selecting an apt fund lies on investors. Beyond that, the portfolio manager and his investment team are ‘first among equals’, while making investment decisions.

Not every stock in the fund portfolio will deliver, or even be apt for every investor in the fund. However, so long as the portfolio helps investors achieve their financial goals (while adhering to their risk profile), it is fine.

Furthermore, when investments fail, it shows in fund performance, opening it to investor scrutiny. Any investor who loses conviction in the portfolio manager and his process, has every right to liquidate his holding and invest elsewhere.

Don’t get me wrong: Indeed, fund companies must be held to the highest standards of probity. Also, Indian fund companies haven’t exactly covered themselves in glory when it comes to acting in investor interest.

Heck, I don’t think anyone has been more critical of the Indian mutual fund ecosystem than me.

However, running down and questioning the very utility of mutual funds as investment avenues because some fund companies invested in a questionable IPO is excessive.

#Lenskart, #IPO, #mutualfunds, #investing

What Explains SEBI’s Newfound Affinity for NFOs?

Back in 2017, market regulator SEBI decided to define and create mutual fund categories. One of its objectives was to rationalize the number of funds on offer. As a result, it applied a ‘one fund per category’ rule, with some exceptions.

Last week, SEBI released a consultation paper on the same topic (categorization and rationalization of mutual funds). Therein SEBI has proposed several changes, and invited public comments.

Oddly enough, the overarching theme seems to be—launch more funds (read new fund offers—NFOs). Perhaps in SEBI’s books, that is the way forward for the industry.

For instance, one of the proposals is to permit launching a second fund in each of the defined categories, subject to certain conditions being fulfilled. Critics will point out that an asset size of INR 500 bn for the existing fund (one of the conditions) is a big hurdle. It isn’t. Several funds have already breached that threshold, and given the popularity of mutual funds, more will, sooner than later.

Then there are other proposals: Allow fund companies to launch both Contra and Value funds, instead of either one at present. There is a proposal to allow launch of Sectoral Debt Funds. Introducing more Hybrid Funds (Solution Oriented) and Life Cycle Fund of Funds, also find mention.

I have been a vocal critic of fund companies for recklessly launching funds with the sole intent of shoring up assets. Nonetheless, even back in 2017, I had opined that SEBI’s ‘one fund per category’ rule lacked nuance and, in some cases, could result in the baby being thrown out with the bath water.

Perhaps back then, SEBI believed that its ruling was the best way to rein in fund companies. And to its credit, so far, SEBI has stuck to its guns.

That said, I have no idea what’s driving SEBI’s volte-face.

Did fund companies prevail upon it, or, does it truly believe that limiting number of funds, was a flawed move to begin with?

Fund companies have repeatedly demonstrated a herd mentality-like approach. For instance, in categories such as Flexi Cap and Large & Mid Cap, despite the leeway to exploit the market cap spectrum, the average portfolio is consistently dominated by large-caps.

It’s unlikely that more funds will enhance the quality of choices available to investors. But fund companies will gain thanks to more assets.

Will SEBI’s proposals be implemented in toto? Let’s wait and watch.

#SEBI, #mutualfunds, #categories, #NFOs, #investing

A Five-Step Guide to Surviving the Market Crash

As I write this, Indian equity markets are down by roughly 5%. This is undeniably a testing time for equity investors. Here’s my two cents’ worth, on how to survive the market crash:

✅ Don’t Panic

When markets crash sharply, it isn’t uncommon for investors to panic. However, now is the time to stay calm, and not succumb to the frenzied environment. Acting in a panic-stricken state is akin to a surefire recipe for flawed investment decisions. Resist the temptation to sell investments; that will simply convert a notional loss, into an actual loss. Finally, steer clear of the temptation to frequently check your portfolio.

✅ Ignore the Soothsayers

Whenever markets crash, certain ‘market experts’ come crawling out of the woodwork, and make predictions. They will explain in great detail as to why markets crashed, and even predict what is next in store. Guess what, none of these soothsayers predicted the current market crash. Neither do they know what will happen next. They are seeking their 15 minutes of fame. Your interest will be best served by ignoring them.

✅ Introspection is the Key

Remind yourself that equity investing necessitates a long-term investment horizon.

Remind yourself that market crashes are par for the course in equity investing.

Remind yourself of the goals that you planned to accomplish with your equity investments, be it wealth accumulation, providing for your children’s education, or retirement. Selling investments at this stage will likely hamper those goals.

✅ Don’t Discontinue SIPs

Do not discontinue ongoing investments via the Systematic Investment Plan (SIP) route. SIPs operate on the concept of rupee-cost-averaging. A market crash like the present one is when their utility comes to the fore. An investment at this stage will fetch you more units and reduce the total investment cost. This could well be the right time to double down on your investments. Like other items, equities should also be bought when their prices are low (read crashing).

✅ Keep the Faith

A big part of successful equity investing is being optimistic—the faith that the future will be better than the present. Now would be a good time to remind yourself of the robust rally that equity markets experienced post-Covid lows. If that rally didn’t last forever, neither will the market crash.

The truth is that no one knows what’s next in store for markets. This is neither the first time that markets have crashed, nor will it be the last time. That’s just the nature of the beast. As investors, we can’t control how markets behave. Instead, we should focus on what we can control—our actions.

Let’s stay calm and resolute. This too shall pass!

Of New Beginnings, Predictions, and Investing

As another year comes to an end, there’s an air of optimism. The advent of a New Year… a clean slate, brings with it hopes of a better future, and rightly so. The upbeat sentiment can be all-pervasive. 

For instance, even investors are looking forward to a more fruitful 2023. As is customary, investment experts are foretelling what the New Year bodes—which asset class will be in favour, which sector holds promise, even which stocks can be multi-baggers. 

This is also a good time to introspect. The last few years have been eye-openers: 2020 was marked by one of the worst pandemics in modern times; equity markets both—crashed and rose—sharply. In 2021, the virus caused more suffering, yet markets continued their northward ascent. 2022 will perhaps be remembered for a geopolitical conflict, soaring inflation, and a serious likelihood of global recession. 

No expert predicted these events. To be fair, I don’t think it’s possible for anyone to do so. Therein lies a lesson for investors. Rather than focusing on predictions (factors ‘beyond anyone’s control’), investors would do well to focus on what they ‘can control’. By all means, keep an eye on what experts are predicting, but make investments based on what’s right for you.

The basics of investing don’t change because it’s a New Year. In 2023 too, risk-appetite and goals should guide investment decisions. Asset allocation continues to be as important as ever. 

Also, let’s not underestimate the importance of being resilient. To quote a cliché: ‘What doesn’t kill you, makes you stronger’. Living through the pandemic has likely made us more resilient than we realise. Let’s instil that resilience into our investment decisions.

Let’s be optimistic, resilient, and fundamentally-driven, while investing in 2023. Hopefully, a brighter future awaits.

Happy Investing!

#NewYear, #2023, #investing, #mutualfunds, #recession, #goals, #inflation, #YearEnd

Lessons from the Franklin Templeton Episode

Recently, Franklin Templeton Mutual Fund announced that it would wind up six open-ended debt funds. Among others, the fund company’s communication stated:

“There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the Covid-19 crisis and the resultant lock-down of the Indian economy which was necessary to address the same. At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions”.

“…in close consultation with the investment team, are of the considered opinion that an event has occurred, which requires these schemes to be wound up and that this is the only viable option to preserve value for unitholders and to enable an orderly and equitable exit for all investors in these unprecedented circumstances”.

Simply put, the fund company has stated that running the earmarked debt funds has become untenable, in present market conditions. That’s a rather candid admission for an asset manager to make. Of course, there’s no mention of the investment strategy deployed which also contributed to the present state of affairs; but we will discuss that a bit later. Needless to say, in the Indian context, such a step is unprecedented.     

The Rise

Over the years, Franklin Templeton Mutual Fund made a name for itself by deploying a credit risk (or high-yield investing) strategy in the debt funds segment. On that count, it can be safely stated that not only was it among the pioneers, but also first among equals in the mutual fund industry. The fund company emerged relatively unscathed from the financial crisis of 2008. In particular, its investment team steered clear of real estate securities, many of which defaulted.

Subsequently while most fund companies decided that investing in lower-rated securities was not for them, the team at Franklin Templeton stuck to their guns. It would only be fair to mention Santosh Kamath - CIO-Fixed Income, at this stage. A skilled investment professional, he played a key role in setting up the research infrastructure and building a robust investment team. A driving force of the fixed income team, he yielded considerable influence on investment decisions.

For the next 10 years or so, fixed income funds from Franklin Templeton delivered a strong showing in their respective categories. The performance prompted some of the largest fund companies to emulate Franklin Templeton’s fixed income template, and build dedicated ‘credit investing’ teams.

And the Fall…   

Over the last 18-24 months, credit risk as an investment strategy has been out of favour. A slowing economy, followed by several borrowers defaulting took the sheen off the strategy. When investors turn risk-averse, there is a flight to safety--preference for highest (AAA) rated papers. This in turn meant loss of liquidity in lower rated papers, wherein Franklin Templeton largely operated. It certainly didn’t help that a number of papers held by its funds defaulted as well.

The fund company has been in the news for writing down securities it was invested in (simply put: investments went bad, and the funds suffered losses). Industry sources claim that there has been a run on several of Franklin Templeton’s debt funds, with investors queuing up to redeem their investments.

With no liquidity for its investments, the fund company would have had no choice but to sell its holdings at throwaway prices. This in turn would lead to shrinking net asset value (NAV), prompting more investors to liquidate their investments. A classic vicious cycle. Perhaps that led to the decision to wind up the chosen debt funds.    

If You Are an Investor in Funds Earmarked for Closure

For those invested in funds earmarked for closure, this is an undesirable situation to be in. The only option is to be patient, and hope that the fund company can liquidate its holdings at a reasonable price, thereby minimising your losses. In other words--wait and watch.

What Investors Must Learn

1.    Understanding Risk

Some believe that Franklin Templeton erred by pursuing a credit risk strategy, while others claim that debt funds should simply avoid taking on risk. That line of thought is both flawed and naive. The funds in question didn’t turn risky overnight; they were as risky even when they were delivering returns at a blistering pace, for years. No one seemed to complain then. The only change now is that that the underlying risk has come to the fore.

Market-investing is not without risk—that’s the plain and simple truth. The key lies in the risk being clearly communicated (by fund companies, advisers and distributors) and understood (by investors).

2.    Patience is the Key

While investing in markets, one must have adequate time on hand. While this principle is often mentioned in the context of equity investing, it is as relevant in the case of debt funds. Unforeseen events can and will occur. When that happens, time on hand can provide much-needed leeway to sail through. 

This principle holds good even in the Franklin Templeton episode. For instance, investors in the six funds due for winding up, who aren’t faced with investment goals in the immediate future can patiently wait for maturity proceeds of their investments. They won’t be forced to prematurely liquidate other investments from their portfolios.

3.    No One Is Infallible

Even robust investment strategies will falter at some point; the most skilled portfolio manager will make poor investments. Sadly, that is the true nature of investing. Investors must do their bit to evaluate both portfolio managers and investment strategies. That done, they must also accept the fact that even the best will experience failure and under-performance.

4.    Expect the Unexpected

Perhaps, in the final analysis, Franklin Templeton’s move will be in investors’ best interests. But nobody could have seen it coming. In the mutual fund setup, apart from the portfolio manager and the investment strategy, there’s also the fund company, which is run by individuals. One can’t always predict how they will react to a particular scenario. Hence the need to factor in an additional layer of uncertainty.

5.    Diversify

An investor with 15% of his portfolio held in one of the affected funds will be relatively better off, as opposed to someone who invested 30% of his portfolio. Likewise, an investor invested in debt funds from three different fund companies is likely to fare better than someone who invested his entire debt portfolio with Franklin Templeton.

The principle of diversification is relevant not only in terms of asset classes (read: asset allocation), but also while allocating monies to individual funds.