How an obscure PPFAS turned into India’s Berkshire Hathaway

The stupendous growth of PPFAS is reflected in the growth of its Mutual Fund (MF) arm. Its flagship FlexiCap Fund is one of only 11 equity MF schemes in the country with assets under management 30,000 crores. Parag Parikh Flexicap plan was launched in 2013 with only 150 crores in assets. A decade later, it has grown 200 times its size and delivers an astonishing 18.8% CAGR, or compound annual growth rate. This story traces the success of Parag Parikh Mutual Fund and its unconventional path in India’s congested MF industry.

The fund was started in 1996 as a Portfolio Management Service (PMS) by late Parag Parikh, who was a broker and also highly respected as a value investor. In 2013, Parikh converted the PMS into a mutual fund after the MECT regulator SEBI raised the minimum investment amount for PMS. 5 lakhs onwards 25 lakhs.

In its more than 17 years of existence as a PMS, Parikh has given nearly 18% CAGR to its investors and built a steady following. The journey, however, was not without its ups and downs. Parikh stayed away from hot technology stocks during the dot com boom and realty/infra stocks in 2007. PMS also performed poorly in extreme bullish years, including 2007, and this has led to some frustrated investors choosing to exit.

It was a blow to chartered accountant Rajeev Thakkar, who had joined Parikh in the early 2000s and was managing the PMS. However, Parikh’s support kept him going. “In 2007, Rajiv offered to quit because of underperformance,” recalls Neil Parikh, CEO of Parag Parikh Mutual Fund.

AMCs generally offer a host of schemes to investors including large-cap funds, mid-cap funds, focused funds and value funds. However, when Parag Parikh launched his new fund house, he took a completely different approach. It will have only one scheme in its menu and will invest across market segments and international stocks (up to 35% of the corpus). It will also retain the ability to hedge during bull markets by using arbitrage (derivative) positions. Parikh and his team will be ready to ask questions on any stock in the scheme at each annual unitholders’ meeting. There will be no sales target. AMC will grow from ‘Pull’ and not ‘Push’ and all distributors will get equal commission.

Explaining why PPFAS doesn’t have a sales target, CEO Parikh said, “We consider ourselves professionals, not businessmen.”

Parikh’s radical approach, however, did not work in the initial years. MF industry was driven by distributors and big banks who cared more about commission. But, PPFAS was not playing ball. Parikh’s single plan approach meant that he relied heavily on the single plan that was doing well. The victory of the National Democratic Alliance led by Prime Minister Narendra Modi led to a massive market rally after the 2014 elections, and the conservative value-driven PPFAS fared poorly. Then, in 2015, AMC suffered a major setback. Parag Parikh died in a car accident while returning from Warren Buffett’s annual investor meeting in Omaha, USA.

Neil Parikh said, “We were concerned about a run on funds and had made detailed plans to liquidate assets and create a cash buffer.” Jobs. Yet, another bull rally in 2016-17 caught the fund house unawares. It was led by mid- and small-caps, and PPFAS had a smaller allocation to these segments than its peers. “At that time, it seemed we would never overcome 700 crore in size,” Parikh said.

And, then the tide turned. “When the tide comes in, you realize who’s swimming naked,” an old market saying goes.

India’s stock market lost momentum in 2018-2019 due to the default in IL&FS. PPFAS was one of the few exceptions. US tech stocks were also doing well, adding tailwinds to the fund house’s global portfolio. The AMC had also completed five years of existence, bringing it on the radar of money managers and agencies that gave it star ratings soon.

In 2019, PPFAS FlexiCap delivered 15.3% returns, compared to 11% for the category. In 2020, it increased to 33.55% (compared to 16.75% for the category). “We had 17% cash at the time of the pandemic,” says Neil Parikh. It is a once in a lifetime opportunity, Parikh said. In the calendar year 2021, the plan grew by an incredible 47%, beating the flexicap category’s 33.6%.

Thus began its glory days, but PPFAS has had its share of critics as well. Some said its performance was driven by a rally in US tech stocks and could be replicated simply by buying a Nifty and S&P 500 ETF in the ratio of 65:35. He argued that without international shares, it would be just a mediocre performer. The company responded by launching the Parag Parikh TaxSaver Fund in 2019 which paid off all this criticism. A purely household-focused fund, the scheme has outperformed the ELSS, or Equity Linked Savings Scheme, category in each year of its existence.

Another innovation—a debt fund with the ability to invest a small amount in dividend-yielding stocks and real estate and infrastructure trusts (REITs/InVITs)—also proved successful. PPFAS Conservative Hybrid Fund has given 7.66% returns since its launch in May 2021, and has outperformed most of the debt funds in the Conservative Hybrid category as well.

Another concern for the firm is the decline in international allocations (currently 17%, down from 30-35% about three years ago), as the MF industry reaches the limit set by the Reserve Bank of India for foreign allocations. This takes away a key strength of the PPFAS AMC, but may prove to be a temporary challenge that can be overcome once India’s foreign exchange reserves strengthen and the cap is removed by the central bank.

All AMCs are meant to come back at some point and after three years of rising performance, PPFAS too hit a rough patch in 2022. However, AMCs have always advocated a minimum time horizon of 5 years and 2023 has already seen an improvement in the same. “I have underperformed before, and I will underperform again,” Rajeev Thakkar, now chief investment officer, told a stunned audience at the 2022 unitholders’ meeting. However, Thakkar said this should not matter for long-term investors. For those willing to accept the ‘Tortoise Way’, (meaning slow and steady growth) significant wealth creation may still be in store.