Where to invest Rs 10 lakh today? Don’t lose faith in US tech stocks, says Rajeev Thakkar of Parag Parikh MF

Rajeev Thakkar, Chief Investment Officer and Associate Director, PPFAS Asset Management Private Limited

Rajeev Thakkar manages the Parag Parikh Flexi Cap Fund (PPFCF). About Rs 5,000 crore —25-30 percent — of its corpus is allocated to foreign stocks, the largest of all overseas-focused mutual fund schemes. Only Motilal Oswal Nasdaq fund’s corpus matches the international allocation of PPFCF, but that is a dedicated international fund.

PPFCF, though, is a diversified equity fund that invests at least 65 percent in Indian equities. The fund house, which vowed not to launch multiple schemes and instead have a single diversified equity fund that does everything, has stuck to its word. But the year 2022 has challenged its principles.

That year, information technology stocks in the US fell sharply. That, in turn, led to a fall in the net asset value of PPFCF.

Further, in early 2022, the limits allowed to fund houses to invest abroad got exhausted. What was initially thought to be a temporary phase has now become a year-long deadlock. The Reserve Bank of India still hasn’t enhanced these limits. As a result, fund houses based in India cannot invest fresh money abroad. They can only reinvest the money generated out of sale of shares abroad. This has hit mutual funds hard as overseas investments have become a popular part of an investor’s asset allocation.

But Thakkar, Chief Investment Officer at PPFAS Asset Management, is looking ahead. In a conversation with Moneycontrol, he talks about why the US technology sector still looks bright. And he has some good ideas on where you should invest your money today.

After a fabulous 2020 (32 percent returns) and 2021 (46 percent returns), Parag Parikh Flexi Cap Fund had a disastrous 2022. It clocked -7 percent returns, as against a gain of 6 percent of the Nifty 50 (Total Returns Index) and 4.3 percent of the Nifty 500 (Total Returns index). A lot of investors had invested in your fund in 2022 based on past performance. Does that make you nervous?

A 6-month period, a year, comes and goes. Even Covid would have come and gone in this five-year period.

Yes, technology stocks in the US — which Parag Parikh Flexi Cap Fund (PPFCF) has been investing in — have corrected quite a bit from the highs of 2022. But do not look at 2022 in isolation. Look what happened in 2020 and 2021. The biggest beneficiaries of Covid were the tech companies.

Shopping shifted online, advertising shifted to digital platforms, we consumed much more content on streaming platforms. Investment in tech accelerated. Cloud computing picked up and people started communicating over Zoom and so on. Hence, these technology stocks ran up on the stock markets.

In 2022, they gave up a part of those gains as offices reopened and people returned to them. Over a two-three year period, that is not abnormal. Some stocks faced sales pressure due to excessive pessimism. In fact, we are just one month into 2023 and some of the stocks have already doubled from their November or December 2022 lows.

Is there a lesson in this for Parag Parikh Mutual Fund? To, perhaps, diversify beyond technology companies? Perhaps go beyond the US?

Let me ask you a question: is Disney a technology company or is it a traditional company? Now Disney operates Disney+, a movie streaming service, that competes with Netflix.

Is Netflix a tech or an entertainment company? Is Amazon a tech company or a retail company?

Is Walmart an old-school brick-and-mortar retail company or is it a tech company? Walmart has physical stores. But it also owns Flipkart and Walmart.com.

The reality is that software is eating the world. Eventually every company is a tech company. Closer home, PayTM offers UPI. But so does HDFC Bank and Kotak Bank. Is Kotak Bank a tech company or a banking company? Is PayTM a tech company or a banking company?

The lines are very blurred.

The four or five companies that we have invested in internationally are very different from one another. Meta Platforms is a social media company dependent on digital advertising, whereas Amazon is largely a retail company with a good cloud computing business.

Microsoft is more into corporate information technology and operating systems. I think today there is no company that can do without a tech strategy. And the boundary between tech and non-tech is very artificial. If you are investing in Netflix, the competitors are Zee, Sony and Disney Hotstar+. We don't own Netflix, but just for example’s sake, even though Zee TV has a Zee5 mobile app where it delivers content and entertainment, it was and still could be considered a traditional cable television company.

Now that Covid is almost gone and people have returned to office, the dynamics for many technology companies have changed. Any change in your strategy? What sort of international companies would you invest in, going forward?

Covid led many to adopt technology. Now obviously, when things opened up, some of those gains were reversed. Like e-commerce taking a hit when lockdowns got over and physical stores opened up. Some of that online spend will now go back to physical (stores).

But when you look at the market size today versus pre-Covid, in  many categories, the market  size is higher. So, let us say the market size of something pre-Covid was X, when Covid struck it became 2X. Now, when things have opened up, we haven't gone back to X, we’re maybe 1.5X.

So, we have adopted to technology, one way or another, you are saying.

Given  the monetary tightening, gone are the days of tech firms blindly chasing growth and revenues without focusing on cash flow and profits.

Indeed, some of the startups have taken such a beating they may not recover. We at Parag Parikh have always invested in mature companies which can be valued in terms of how much revenue they generate, what is the free cash-flow per year, and fundamentals like that.

For somebody who wants to invest abroad, pending the lifting of the mutual fund limits, what would you advice? Should we wait for mutual fund limits to be raised, or shall we try investing directly in foreign stocks under the $2,50,000 a year Liberalised Remittance Scheme (LRS)?

Things have become a bit difficult, operationally. Budget 2023 too didn’t help. It imposed a TCS (Tax Collected at Source) of 20 percent for money sent abroad. Thus, if you want to invest abroad you need to first pay 20 percent of that as taxes. You will get that money back, but only when you file your return. It's not an expenditure as such, but it blocks your money unnecessarily.

Also read: Edelweiss MF, Kotak MF put restrictions on international funds

But yes, there is still merit in investing abroad. You can mitigate the country-specific risks. It's just that it's become a little bit more difficult to execute.

Pending the mutual fund limits being lifted, can one still go ahead and buy stocks directly on foreign exchanges?

Yes, you can. But keep in mind some crucial aspects.

Bear in mind the foreign exchange (FX) rate that banks give. Negotiate the FX rate. Many times, a lot of the gains may be taken away by adverse conversion rates.

Be aware of the tax policies, both Indian laws as well as those of the country you invest in.

Understand the inheritance tax laws in the country that you are investing in. For example, if someone is investing in the US, and if it's a reasonable amount, sometimes the inheritance tax can go as high as 40 percent. So, if someone invests a million dollars and passes away, the inheritor may end up paying $400,000 as inheritance tax and only get 60 percent of the investment back.

Look into such nuances before you rush into buying shares and ETFs directly. None of these factors crop up if you invest through an Indian-domiciled mutual fund scheme that invests abroad.

If I have Rs 10 lakh today, where should I invest? Which sectors look the most attractive to you?

Banking, mostly private sector banks, looks reasonably good. Banks have cleared up their non-performing asset (NPA) issues of the past, and the balance sheets are looking good.

Look at select government-owned companies where the government is looking to bring down its stake and exit. There could be some quality issues as governance has been a big question mark in the public sector. Though with Air India’s sell-off, the government has walked the talk.

Recently, the government has been spinning off non-core assets in a lot of public sector companies. They've invited expressions of interest in many of them. If some of this privatisation goes through, then that would be an interesting space to watch.

IT services have been beaten down. Those are reasonably well-governed companies. Sure, some near-term challenges remain in terms of demand from the US and other countries. But long-term investors will be rewarded, provided you have the patience.

You were once bullish on financial services companies too. Do you still like them?

Yes, we own some of the fee-based companies which are not in the lending space but are linked to the financialisation of savings.

We own one depository, one commodity exchange, one power exchange. We are still invested in that space.

Should we invest in fixed income investments now? If so, then how much?

Fixed income looks exciting today. The yield curve is flat, presently. Today, a one-year certificate of deposit is available at an annualised yield of somewhere around 7.65 percent at top-notch banks like State Bank of India and HDFC Bank. Even if you go for longer-tenured securities, the yields are more or less the same.

Also read: India's first municipal bond opens for subscription. A Moneycontrol review

Therefore today there is no advantage to buying longer-tenured debt securities. You can buy one-year or two-year debt securities and get the same return. For most investors, I’d suggest 70:30 equity-debt asset allocation.