"Sometimes taxation and inflation are so high that real return is negative"

Over the years, the mutual fund landscape in India has been primarily dominated by the asset management companies (AMCs) sponsored by big banks and group companies. However, amidst these industry giants, there is one standout player that has defied the odds and grown significantly in the past decade - PPFAS Mutual Fund (aka Parag Parikh Mutual Fund). Recently, we had the privilege of speaking with Mr Rajeev Thakkar, the Chief Investment Officer and fund manager of PPFAS Mutual Fund. Under his guidance, the Parag Parikh Flexi Cap Fund has emerged as one of the largest actively managed equity funds, growing both in size and popularity. In our conversation, Mr Thakkar shares his insights on current global macro trends, the advantages of managing a larger asset size, his distinctive approach to investing in India compared to abroad, and sheds light on some of his portfolio decisions. Given the US's recent fiscal imprudence and periodic raising of the debt ceiling, there appears to be a gradual shift away from the dollar as the world reserve currency. In this context, how do you evaluate the prospects of your investments in foreign equities, specifically in the US? What are the big risks facing Indian investors directly investing in US companies? Fiscal imprudence, I think, has been around in almost all economies since the time we moved to paper currency or fiat money. The US dollar historically had some linkage with gold, but again, they were printing more than the gold they had. And finally, they even gave up the pretext of converting dollars to gold. So, wherever there is an option of spending more than what is raised through taxes, politicians will exercise that right as it earns them popularity with the voters. However, this is fiscally imprudent in one form. In the end, what happens to investors is if you are holding an inordinately large amount of fixed-income securities, whether it be bank fixed deposits, government bonds or any other such security, the returns that you get are overstated. This is because most of this return comprises inflation, and the real rate of return is very small. And sometimes, taxation and inflation are so high that real return goes into negative territory. Buffett has spoken about this at length on various occasions. He talks about this in terms of individual skill sets as well. He says if you are the best surgeon in town, people will pay a fair fee to get your services (irrespective of the currency and inflation). And from that fee, you can afford a very comfortable and decent lifestyle. (Hence), you should not worry too much about inflation because if prices of other things go up, your (cost of) service will also go up. (So) what we are trying to do is we are trying to invest in businesses with pricing power, where they are not in excessively competitive sectors, or they have a differentiated p

This article was originally published on June 06, 2023.