Parag Parikh Flexi Cap current underperformance not noteworthy; cash at 14-15%, HDFC Bank outlook unchanged: Rajeev Thakkar

The recent underperformance of the Parag Parikh Flexi Cap Fund is “not noteworthy” in terms of its duration or magnitude, said Rajeev Thakkar, CIO and Director, PPFAS Mutual Fund.

Thakkar said in a note to the unitholders, that there can be periods when stocks in the portfolio remain weak or decline, particularly as PPFAS MF often invests in stocks and sectors that are out of favour with the market. He also stated that the cash allocation in the flexicap fund has fallen to around 14-15% from a peak of about 25%, while its outlook on a basket of four private sector banks in the portfolio, including HDFC Bank, remains unchanged.

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Equity returns cannot be compared with fixed deposits

Thakkar pushed back against concerns that the fund has not delivered returns comparable with bank fixed deposits. He said investors seeking guaranteed FD-like returns should invest in fixed deposits, while equity investments inherently involve volatility. According to him, this volatility is also what gives equities the potential to deliver higher returns over the long term. He added that the market’s current rangebound phase is neither unusual in duration nor significant in the extent of correction.

Parag Parikh Flexi Cap Fund’s recent underperformance

Commenting on the recent underperformance of the Parag Parikh Flexi Cap Fund, the largest active fund and flexicap fund based on assets managed and managed by PPFAS Mutual Fund, Thakkar said PPFAS schemes have delivered satisfactory relative performance over a full market cycle, while acknowledging that short-term periods of three months, one year or longer can see portfolio stocks underperform or decline.

He attributed this partly to PPFAS MF’s strategy of investing in stocks and sectors that may be out of favour with the broader market. Thakkar said the fund’s current underperformance is neither noteworthy in terms of duration nor magnitude and rejected the view that it is primarily due to the scheme’s large AUM.

Thakkar added, “Cash levels peaked at about 25%. They are down to about 14%-15% in Flexi Cap. We are increasingly finding opportunities to buy, and one may look forward to single digit cash levels in some time.”

He also explained the rationale behind maintaining higher cash levels during the previous two years. According to him, the cash position did not hurt investor returns and, at the margin, helped the portfolio during the sideways phase of the market.

Thakkar recalled that he had experienced a much larger period of underperformance in 2007 despite managing a PMS corpus of just over Rs 100 crore, arguing that fund size alone does not explain the recent performance.

HDFC Bank outlook remains unchanged

While addressing concerns over HDFC Bank, Thakkar said that PPFAS MF remains comfortable with its basket of four private sector banks. He noted that RBI oversight, diversified ownership and strong governance provide safeguards, while the concerns around HDFC Bank do not appear to pose a material threat to its franchise or customer base.

PPFAS MF is not driven by market-cap labels

Thakkar said PPFAS MF invests across large-, mid- and small-cap stocks based on opportunity and risk-reward, rather than market-cap labels. Citing valuations of 20.8 for Nifty 100, 30.7 for Nifty Midcap 150 and 34.6 for Nifty Smallcap 250, he questioned the assumption that smaller companies automatically deliver higher returns. He also urged investors to look at the US markets to understand this dynamic.

Improving opportunities after market correction

Thakkar said the equity market’s rangebound phase over the past two years is not unusual, as markets can remain sideways or decline for extended periods. He noted that equity returns come with volatility and should not be expected to be predictable over short periods. However, the correction has improved the availability of investment opportunities, with the outlook for future returns now improving after the broader time and price correction.

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Not chasing popular themes and AI sell-off is an opportunity for IT services

Thakkar said PPFAS MF does not chase popular themes such as defence, AI, energy transition or fintech, but invests where it finds attractive risk-reward opportunities. On AI, he said the fund house views the IT services sell-off as an opportunity rather than an existential threat, as AI may change how work is done without eliminating the need for implementation. He added that while AI could displace some jobs, it could also create opportunities in areas such as cybersecurity.

No direct exposure to OpenAI or Anthropic

Thakkar said PPFAS MF has no direct exposure to pure-play AI model companies such as OpenAI and Anthropic. He noted that the increasingly competitive AI landscape means the most advanced model may not necessarily emerge as the sole winner, with factors such as sovereignty, access, cost, speed and data privacy also likely to play a role.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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