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‘Frenzy is more in the NBFC space rather than banking stocks’

Author: Kumar Shankar Roy/Wednesday, July 4, 2018/Categories: Expert View, The Finapolis Conversation

‘Frenzy is more in the NBFC space rather than banking stocks’

Ask any fund manager about current valuations, and the standard response is either Indian equities are ‘still relatively cheap’, or ‘think about long-term’. There are very few equity funds today which hold a huge amount of cash, as most investment managers prefer to be fully invested. But, Parag Parikh Long Term Equity Fund, the flagship equity scheme of PPFAS Mutual Fund, has always been a maverick of sorts. With over 20 per cent of the money in cash, clearly Rajeev Thakkar, the fund house’s chief investment officer, is sending a big message about the paucity of investible ideas at attractive valuations. His Rs 1,000-crore fund’s biggest bet happens to be Google’s parent Alphabet. Thakkar isn’t bearish about Indian stocks. He is still interested in quality businesses available at attractive valuations. Read this interview to Kumar Shankar Roy if you want to know his thoughts on ideal time horizon for equity investing, the type of funds every investor needs, and his strategy when it comes to PSU banks.  

For someone with 2-3 years of time horizon, is today a good time to be invested in equity mutual funds and why?

In my personal opinion, it is never appropriate for investors with a time horizon of 2-3 years to invest in equities. Equities as an asset class have a potential to deliver inflation-beating returns and compound wealth over the long term. At the same time, it is a volatile asset class affected by various macroeconomic factors, political events, sentiment and so on. In extreme cases, one can have periods as long as decades where the asset class gives flat to negative returns. (India from 1992 to 2003, USA from 2000 to 2010 etc.) Hence, when it comes to equities, the longer the horizon the better. In any case, investors should look for a minimum horizon of 5 years.

Your fund-house had launched a liquid fund just two months ago. Is a liquid fund suitable for individuals in the lower income tax bracket? How should investors choose which liquid fund to buy given that there are so many choices?

A liquid fund provides investors with a flexibility of withdrawing money with a day's notice and at the same time, earn attractive returns. In an era where savings bank accounts were giving returns of 3 to 4 per cent p.a. and current accounts paid zero, liquid funds were an attractive option.

Even today, current accounts do not pay any interest and most bank savings account pay 3.5 per cent. Some of the new age private sector banks and online bank accounts are paying higher rates that are comparable with liquid fund returns and investors who are in the lower tax bracket can choose either liquid funds or private sectors savings accounts where interest rates are higher.

Most liquid funds across fund houses are quite identical and give very similar risk and return profile. While selecting funds, one should stay away from funds taking an excessive risk by investing in low-quality corporate debt to chase higher returns. Quick indicators of this kind of behaviour are significantly higher returns in the past as compared to the category and low credit rating of companies where investments are made.

Parag Parikh Long Term Equity Fund, the flagship equity scheme of PPFAS Mutual Fund, has completed five years in May. What is the USP of the fund vis-a-vis other multi-cap schemes?

Every country / economy goes through cycles. For example in India, equity indices gave negative returns for the period 1992 to 2003. USA gave flat returns for 2000 – 2010. An equity investor would like to reduce the chances of such occurrences affecting their portfolio returns. One way out is geographical diversification by adding overseas stocks. In any case about 94 per cent of the global economy is outside the Indian economy. By investing a part of the money overseas, one has the opportunity to invest in innovative companies like Apple, Amazon, Google, Facebook and so on. The USP of Parag Parikh Long Term Equity Fund is that it can invest up to 35 per cent of its funds in overseas stocks.

As an asset management company, you have limited yourself to just two schemes in a world where there are fund houses with dozens of products. Do you think needs of your investors could be met with just two types of products?

An investor broadly has the following needs:

· Emergency funds / short term spending money – Met by Liquid Mutual Funds

· Long term Asset Purchase / Wealth creation / Retirement goals – Met by Equity Funds

· Income generation / Medium term asset purchase – Met by Debt Mutual Funds

· Tax saving plus wealth creation – Tax Savings Schemes

While our two schemes meet the first two needs of investors, we currently do not have offerings in the debt funds space and in tax savings fund space. We will launch products in those two spaces in the future.

Your equity fund is holding 23 per cent in cash, up from 17 per cent about a year back. It is said that when there is a mindset to raise cash, fund managers stop looking at new ideas. Is that true?

Cash for us is a residual position. We do not start out by saying that we will hold X per cent in cash. We keep looking for ideas both among existing positions (to add weight) as well as new stocks which are not part of the portfolio currently. It is only when we have a paucity of investible ideas at attractive valuations that we hold cash.

How do you view PSU banks as investment opportunities?

Barring small stretches of periods and a few exceptions, PSU banks have not been great wealth creators. In sector after sector where we have seen opening up of the sector to private players, we have seen PSU businesses losing ground. Prominent examples are telecom and airlines. Banking is also similar. Each passing year we are seeing a lower market share of the PSU banks. We do not look at them as attractive opportunities and do not have investments in this space in our portfolio.

Overall markets are heavily reliant on banking over the years. Is this a big risk?

Each time one particular sector becomes a very large portion of the market, it is a time to be cautious. At this point in time, I would feel that the frenzy is more in the NBFC space rather than banking stocks.

As we go into a year of tightening of easy money globally and elections in India, have you positioned your portfolio keeping in mind these events and why so?

Tightening of money supply and rising interest rates surely are headwinds for the markets and elections in India add to the uncertainty. We, however, keep looking for investible ideas and if a quality business is available at attractive valuations, we would not shy away from investing in the same despite a short-term hazy outlook on macroeconomics or politics.

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