Investors expecting 15-20% returns may be disappointed: Rajeev Thakkar

Investors should get used to lower nominal equity returns, said Rajeev Thakkar, chief investment officer and director at PPFAS Mutual Fund. In an interview with Nishanth Vasudevan, Thakkar, who manages ₹1.62 lakh crore of investor money, discussed various topics, including valuations, investing abroad, his fund's cash positions, and the theme of AI. Edited excerpts:

Is the worst over for the markets, now that there is some semblance of peace in West Asia?

There has been some time correction in specific stocks and some price correction as well. From that point of view, things are looking better.

There will be challenges in the June quarter, and maybe even one or two quarters, because of supply chain issues and higher input costs. After that, things will normalise. Earnings may not be that robust, which is okay because people are factoring that in. This creates a base for more reasonable valuations and returns.

In 2024, one big concern about India was valuation excesses. Have those excesses gone away after 2 years?
They have not completely gone away. The average market is at average multiples. The Nifty is at around 20 times earnings. There is a segment of the market that is attractive and cheap. There is still a segment that looks frothy. That segment still must either time-correct or price-correct.

So, what does that mean for equity returns?

People must get accustomed to lower nominal returns, given that corporate profits have not been growing that fast. This get-rich-quick kind of thing will not work. People coming into equities expecting 15-20% returns may be disappointed. If someone is willing to give it five years and accept that if fixed income is giving 7, I am happy with 10-12%, then it can work.

Where do you see the biggest mispricing in the market?

The newer listings and extremely competitive spaces where profitability is hard to come by. The food delivery and quick commerce space, for example. Two listed players, a third one about to get listed, two MNCs competing in that space, and some bigger corporate houses in India wanting to compete there.

As a consumer, of course, there is a strong value proposition. They are seeing revenue growth. But cash flows and profits are tough, given the elevated competition.

In the case of discount brokers, the profit growth has come in a benign environment. Now, in an environment where the end customer is not making too much return, trading volumes could be subdued.

Similarly, there are risks in consumer-facing companies trading at 80, 90 or 100 times earnings. These stocks are pricing in all the favourable outcomes in the future. If something even small goes wrong, investors could end up losing money.

You have been criticised by a section of the industry for holding higher-than-average cash in your portfolios. What is your response?
I think people should focus on what they do rather than what others are doing. The Flexi Cap category allows a minimum of 65% in equities and up to 35% in debt and money market instruments. It is permissible, and from day one, we have been saying this is our style. If you don't like this approach, don't invest in it. Invest in funds where money is deployed 100% all the time. I don't see why the criticism is so intense.

If there were no restrictions on investing abroad, what would your portfolio look like?
India's market cap is 3-4% of the global market cap. The fund structure allows us to invest up to 35% in global stocks. But that is constrained by the RBI's limit. If those restrictions were not there, we would probably be 30% invested in global stocks, like we were before the limit was set.

There is a growing view among domestic investors that if they want alpha, investing only in India is not enough. Do you agree?
It is not about getting extra returns. It is about reducing risk in the portfolio.

From 2000 to 2010, Indian markets would have done far better than the US. US markets had 10 years of zero returns. Over the last three or four years, US markets have done much better than Indian markets. So, when you go abroad, you are able to diversify your portfolio. When you have India plus global, the journey becomes smoother rather than lumpy.