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.

Despite South Korea and Taiwan running up so much, their valuations are still cheaper than India's. Is that bad news for Indian equities?
Not necessarily. Earnings expand dramatically at the peak of a cycle and, at that time, the multiples look cheaper. But those earnings can be pretty volatile. Right now, things look okay, given the capital expenditure that AI companies and hyperscalers are spending. But that can reverse somewhere down the road.

People who look for diversified investment portfolios will look at India, which doesn’t have single-company dominance.

What is your assessment of the AI-linked IPO boom led by SpaceX in the US? Some are comparing it to the dotcom bubble.
Just like the internet was real, AI is also real. Although internet companies had that big bust in the late 1990s and early 2000s, the internet has had a transformative impact over the next two to three decades. In the same way, AI will have an impact in the longer run. But there will be companies that could go bust. The laws of economics have to work.

If you are incurring capital expenditure and running these things as a business, revenue should cover your running expenses and go towards servicing your capex. You cannot have just volume growth or just consumption of tokens, as is the fashion these days.

To that extent, investors must be cautious about what they are buying and at what valuation they are buying.

What about SpaceX’s valuations?
I can't make sense of SpaceX's market cap and valuations. Again, unlisted companies like OpenAI or Anthropic, which are apparently seeking trillion-dollar valuations, don't earn profits, although they earn top-line revenues. The bottom line is negative for these companies.

One-off, you could see some companies succeeding. But if you buy these as a group, the chances of losing money are probably higher than the chances of making money.

What are the current valuations of the IT sector telling you about its long-term growth outlook?
The impact of AI on the IT sector is still fuzzy. Our preference is for companies that have cash flows today rather than cash flows far into the future. These companies earn in dollars and pay in rupees, while wage inflation is likely to be subdued. For an IT services company, the job is to take specifications from the customer, deliver code that works and maintain it over time. Whether that work is done by humans or partly by machines, the work itself remains the same.

What’s your advice to investors? How should they position their portfolios?
The answer comes from your own financial position rather than from someone in the asset management industry guiding you. If you are saving for retirement and have 10, 15 or 20 years ahead of you, the bulk of your money should be in equities. If you have a three-year horizon, put money in equity savings funds or conservative hybrid funds. If you are in a higher tax bracket and have a one-year horizon, put it in arbitrage. We keep repeating asset allocation ad nauseam, but people don't listen to us. That's where much of the anxiety comes from. If equities were guaranteed to give higher returns than bank FDs every year, then bank FDs would not exist as a product.