Equity vs. Fixed Deposits: Rajeev Thakkar on Market Volatility

If you’re investing in equities, don’t expect the guaranteed returns of a bank fixed deposit. Rajeev Thakkar, Chief Investment Officer at PPFAS Asset Management, stresses that market volatility is a natural part of equity investments, which is the price for potentially higher long-term returns.

Understanding Market Swings

Thakkar clarifies that market downturns, sideways movements, and corrections are all normal phases. He advises against seeing these periods as failures of equity investing, especially when you compare recent equity performance with fixed deposit rates.

• He explicitly stated: “The only way to guarantee a bank FD return is to make a bank FD.”

Why Fund Performance Fluctuates

His insights come as the Parag Parikh Flexi Cap Fund’s recent performance has been under review. This includes its cash allocation, exposure to HDFC Bank, and its position in a market with some elevated valuations.

Thakkar maintains that the fund’s current underperformance is not unusual and doesn’t warrant changing its long-term investment philosophy. He adds that weak performance can happen when a strategy intentionally invests in companies currently out of favor.

Cash Allocation Adjustments

The fund has adjusted its cash holdings based on market valuations. As investment opportunities become more attractive, further reductions in cash are expected.

• Cash allocation decreased from approximately 25% during early 2024.
• It now stands at 14-15% as valuations have moderated.

Views on HDFC Bank and IT

PPFAS continues to hold its position in HDFC Bank, viewing it as one of four private-sector banks in its portfolio. Thakkar asserts that recent issues at the lender do not signal widespread frauds or governance failures in the sector.

The fund also sees the recent correction in IT services stocks as a good opportunity. They prefer diversified technology companies over those solely focused on AI model development.

Decoding Market Valuations

Thakkar highlighted significant valuation differences across various market segments as of August 4. This shows how different parts of the market carry varying risk-reward profiles.

• The Nifty 100 had a P/E ratio of 20.8 times.
• The Nifty Midcap 150 stood at 30.7 times.
• The Nifty Smallcap 250 was at 34.6 times.

Ultimately, PPFAS will continue to prioritize valuations and risk-reward in its investment decisions, rather than chasing popular market trends or just smaller companies.