The letter comes amid growing scrutiny over the recent underperformance of the Parag Parikh Flexi Cap Fund, with investors raising questions over its returns, elevated cash holdings, exposure to HDFC Bank and positioning amid expensive small- and mid-cap valuations. Thakkar maintained that the current phase of underperformance is neither unusual nor a reason to alter the fund’s long-term investment philosophy.
Equity returns cannot be compared with fixed deposits
Thakkar pushed back against criticism that the fund has failed to deliver returns comparable to bank fixed deposits. He said the only way to guarantee an FD return is to invest in one, adding that volatility is the very reason equities have the potential to generate superior long-term returns. According to him, the current range-bound phase in the market is neither extraordinary in duration nor in the extent of correction.
Cash allocation to decline as opportunities improve
The fund manager also defended PPFAS’ higher cash allocation, noting that cash levels had peaked at around 25% during the market exuberance of 2024 when the fund house had consistently urged caution. As valuations have moderated following nearly two years of time correction, cash levels in the Parag Parikh Flexi Cap Fund have already fallen to around 14-15%. Thakkar expects them to decline further to single-digit levels as more attractive investment opportunities emerge. He added that the elevated cash allocation had marginally helped investor returns during the sideways market.
Fund size not behind recent underperformance
Responding to concerns that the fund’s large assets under management have weighed on returns, Thakkar rejected the argument, saying the current spell of underperformance is typical of a strategy that deliberately invests in out-of-favour sectors and companies. He recalled managing an even larger period of underperformance in 2007 despite overseeing a PMS corpus of just over ₹100 crore, suggesting that fund size is not the reason for the recent performance.
No change in outlook on HDFC Bank
On HDFC Bank, Thakkar reiterated confidence in the lender despite recent concerns. He said PPFAS continues to hold a basket of four private-sector banks and that the issues reported at HDFC Bank do not resemble past sector-wide frauds or governance failures that materially threatened banking franchises. Consequently, there has been no change in the fund’s outlook for its banking holdings.
AI concerns and global technology exposure
The letter also addressed concerns around artificial intelligence and its impact on IT services. While AI is expected to automate some work, Thakkar argued that implementation will continue to require people working alongside AI, while new demand is likely to emerge in areas such as cybersecurity. He said PPFAS continues to view the recent correction in IT services stocks as an opportunity rather than an existential threat.
On global technology investments, Thakkar said the fund has deliberately avoided direct exposure to pure-play AI model developers such as OpenAI and Anthropic, preferring instead to invest in hyperscalers with diversified businesses. Although AI-related capital expenditure remains elevated, he believes enterprise demand will continue supporting these investments and any excess capacity is likely to be absorbed over time.
Valuations, not market-cap labels, drive investment decisions
Thakkar also cautioned investors against assuming that smaller companies are guaranteed to deliver superior returns. Citing Screener data as of August 4, he noted that the Nifty 100 trades at a price-to-earnings multiple of 20.8 times, compared with 30.7 times for the Nifty Midcap 150 and 34.6 times for the Nifty Smallcap 250. He said PPFAS would continue investing wherever valuations offer an attractive risk-reward rather than chasing small-cap labels or popular market themes such as defence, AI, energy transition and fintech.
