Parag Parikh Large Cap Fund: A Worthy NFO?

Parag Parikh, the fund house behind India’s largest active equity fund—Parag Parikh Flexi Cap Fund (₹1.33 lakh crore AUM)—is launching a new Large Cap Fund.

As a rule, we do not recommend investing in NFOs. Most new fund launches are designed to gather AUM rather than solve a genuine investor problem. This fund, however, is neither thematic nor quant “slop.” Instead, it positions itself as a Passive++ strategy. Let’s unpack what that means—and whether it fits into your portfolio.

Passive++: Fixing the Problems with Passive Funds

Active funds charge higher fees and attempt to outperform benchmarks through stock and sector selection.

Passive funds, on the other hand, replicate an index by holding the same stocks in the same weights. In theory, their returns should equal the benchmark minus expenses.

Most popular indices—such as the NIFTY 100—are free-float market-cap weighted. They represent the average portfolio of all non-promoter shareholders. Over time, and especially in efficient markets, most active managers struggle to beat these benchmarks. This has driven the steady rise of passive investing.

But passive funds are not without flaws.

The Hidden Cost of Passive Investing: Impact Cost

While passive funds aim to closely track their indices, in practice they suffer from impact costs, primarily from two sources:

• Stocks entering the index

• Stocks exiting the index

  
  

Passive funds are required to reflect these changes immediately. When large amounts of money buy or sell the same stocks on the same day, prices often deviate from fair value. This leads to tracking error and return slippage—costs that investors rarely see but routinely bear.

How Parag Parikh Tries to Do Better

The Parag Parikh Large Cap Fund is technically an active fund, but its objective is not aggressive stock picking. Instead, it aims to hug the benchmark more efficiently by exploiting small, repeatable inefficiencies that passive funds cannot.

The potential sources of incremental alpha include:

1. Better execution

As an active fund, it is not forced to trade on the exact index rebalancing date. Buy and sell orders can be staggered over time, helping reduce market impact and improve execution prices.

2. Arbitrage Opportunities

Daily inflows require funds to deploy capital regularly. At times, stocks may be cheaper in the futures market. Buying via futures and taking delivery at expiry can marginally improve costs—something passive funds are not permitted to do.

3. Corporate Action Arbitrage

Occasionally, M&A events create pricing inefficiencies. For example, during the HDFC–HDFC Bank merger, HDFC Ltd traded at a ~3% discount to HDFC Bank considering their merger ratio. Passive funds cannot exploit such opportunities.

It’s important to set expectations correctly: any outperformance, if it materialises, is likely to be modest and incremental—not headline-grabbing alpha.

Parag Parikh believes that these small efficiencies, when applied consistently, can help reduce tracking error and may marginally improve outcomes relative to the benchmark.

Does It Belong in Your Portfolio?

As always, it depends.

A portfolio is not a collection of schemes—it is a system designed to deliver the right:

• Asset allocation

• Factor exposure (value, growth, momentum, etc.)

• Alignment with your goals and time horizon

  
  

That said, it has become increasingly difficult for large-cap funds to outperform the NIFTY 100 TRI. Indian markets are deeper, more liquid, and more competitive than ever.

If you are:

• Currently using a NIFTY 100 index fund, or

• Holding an underperforming large-cap active fund,

then Parag Parikh Large Cap Fund (Direct, Growth) may be a reasonable alternative—provided you understand that the objective is efficient benchmarking, not aggressive alpha generation.

You can use the Otto Money app to evaluate how your existing large-cap funds have performed and whether a switch makes sense.