Why 15-20% Equity Returns May Be Hard to Achieve, Says Rajeev Thakkar

Investors chasing high-octane returns in the Indian equity market may need to recalibrate their expectations. Rajeev Thakkar, CIO of PPFAS Mutual Fund, warns that the era of "get-rich-quick" equity gains is fading as corporate profit growth slows down.

Tempering Expectations for Equity Returns

For many retail investors, the benchmark for equity success has long been the 15-20% annual return bracket. However, Rajeev Thakkar, who oversees ₹1.62 lakh crore in assets, suggests this may lead to disappointment. He argues that because corporate profits are not growing at the explosive rates seen in previous cycles, investors must adjust to lower nominal returns.

Thakkar proposes a more pragmatic approach: if fixed-income instruments are yielding around 7%, a realistic expectation for equity should be in the 10-12% range. He emphasizes that a long-term horizon of at least five years is essential to navigate market volatility and achieve these modest but steady gains.

While the Nifty 50 is trading at reasonable multiples of around 20 times earnings, Thakkar notes that the market is not uniformly priced. A significant portion of the market remains "frothy," necessitating either a time correction or a price correction.

He identifies specific areas where mispricing and high risk are prevalent:

  • Quick Commerce and Food Delivery: Despite high revenue growth, intense competition from MNCs and large Indian conglomerates makes profitability and cash flows difficult to sustain.
  • High-Multiple Consumer Stocks: Companies trading at 80 to 100 times earnings are pricing in perfect future outcomes. Any minor setback could lead to significant capital erosion for investors.
  • Discount Brokers: Their recent profit growth occurred in a benign environment; however, if end-customers face lower returns, trading volumes—and subsequently broker profits—could subside.

The Strategic Importance of Global Diversification

Addressing the debate over domestic vs. international investing, Thakkar argues that investing abroad is not merely about chasing "alpha" (extra returns), but about risk management. He points out that while India outperformed the US from 2000 to 2010, the US outperformed India over the last few years.

By diversifying globally, investors can smooth out the "lumpy" returns often associated with a single-country portfolio. Thakkar noted that if not for RBI restrictions, his fund would likely aim for a 30% allocation to global stocks to ensure a more stable investment journey.

Defending the Cash-Heavy Strategy

Responding to industry criticism regarding PPFAS Mutual Fund’s tendency to hold higher-than-average cash, Thakkar remained firm on his fund's philosophy. He reminded investors that Flexi Cap funds are permitted to hold up to 35% in debt and money market instruments. For his fund, maintaining cash is a deliberate tactical choice rather than an inefficiency, allowing the fund to deploy capital when valuations become more attractive.

Key Takeaways

  • Realistic Benchmarks: Investors should pivot from expecting 15-20% returns to a more sustainable 10-12% target to align with current corporate profit trends.
  • Avoid Valuation Traps: Extreme caution is advised regarding consumer-facing stocks trading at 80x+ earnings and hyper-competitive sectors like quick commerce.
  • Diversification is Defensive: Global investing should be viewed as a tool to reduce portfolio volatility and protect against domestic market cycles.