Flexicap, Hybrid or Asset Allocation fund? Kalpen Parekh CEO of DSP Mutual Fund tells how to choose the best mutual fund

A chemical engineer by education Kalpen Parekh, the CEO of DSP Mutual Fund has decades of experience in the financial services industry and has worked with various reputed organizations such as ICICI Prudential Asset Management Company and Birla Sun Life Asset Management Company after beginning his career with L&T Finance Ltd. During a recent interview with Business Today, Parekh shared his insights on investment strategies for individuals looking to grow their wealth.

BT: Is it the right time to invest in equities? What will be your pick?

Kalpen Parekh: It is always the right time to invest. My view is that, today's market prices, actually become less relevant when you see things 10 - 20 years down. So, you know, investing should be a function of your cash flows and your long-term plans. While I firmly believe that valuations make a huge impact in terms of long-term returns, but , almost 85-90 per cent of our consumers who are investing today in mutual funds are investing through the medium of SIPs. So, when you do a 10 year and above SIP, you're actually investing over the next few years, you are investing over the next 120 months. And today's market matters only to the first instalment of today. The next 119 instalments will happen next month, then month after that, and then year after that. 

So, when investors are investing through the medium of SIP, they are staggering their investments over 10 years, and 10 years means almost two or three different market cycles. And market cycle would mean phases of markets going down, phases of markets going nowhere, and phases of markets rising.

And that's the beauty of this beautiful product called SIP where if markets were to go nowhere over for a few years, like it happened between 2008 to 2013. Just to give you some statistics. Nifty Returns are zero but SIP returns are almost 6-9 per cent CAGR if you're invested in a fund, which did better than Nifty. Or even if let's say you were done in asset allocation in 2008. At the peak of the market, and next five years market returns was zero. The Asset Allocation Fund delivered 6 to 7% CAGR. For an investor who's investing in a staggered manner over the next 10-15-20 years, today's markets become less relevant.

BT: Are equity markets trading at attractive valuations?

Kalpen Parekh: Valuations are slightly cheaper than what they were two years back, but that alone is not the best way to look at valuation. Because you know, valuation should be looked at in absolute terms also that for a country like India, where corporate profits grow between 8 to 15 per cent. And generally, you know, 16 to 17 times earnings is a reasonable valuation where there is reasonable comfort that whatever is the incremental growth rate of profits can materialize into long term future returns of an investor. But definitely they are cheaper than what we had seen after COVID. 

In the last 18 months of consolidation, many times investors feel that last 18 months or two years you have not made money. But for a new investor, when he's coming in when the last few returns are flat or negative, is actually good, because you're getting to invest at lower prices of same prices. And it is good for a future investor, it is good because you're able to collect more units. If NAVs are not high, it's better for someone who wants to add more units, it’s good for them.

BT: Which mutual fund categories are suitable for investment at present?

Kalpen Parekh: It is always best to invest in something which is more durable and timeless and which has less volatility or cyclicality. So, like you know small caps and mid caps will have cyclicality.

Sectors and themes will have extreme cycles where they will go up faster and they will fall down also faster. So, for an investor the best thing is to invest by Flexicap funds which invest across market caps and when more than the market cap the principles of investing are important, which is what type of businesses is the fund investing in.

We invest in companies, where balance sheets are strong, it can withstand good times and bad times. And we invest in companies where the management is good governance quality is reasonable and many times such ideal companies are not available cheap and that is where the valuation element comes in.

So, such companies are not generally cheap, they are cheap only in periods of crisis like a COVID crash or housing crash. So, we have to be patient by giving more time horizon of at least eight to 10 years. So, you know, the best way to invest is through Flexi Cap fund the best way to invest a lot of lump sum is when markets are going nowhere or wind down. And another best way to invest for the long term is through SIPs where market timing is completely taken out .

Having said that, some banks form a fairly large part of our portfolio today. Another sector which is a dominant part of our portfolio is pharma and healthcare. The sector actually, kept on coming down when a lot of pharma companies, their prices lowered by 20 to 40%, they were having their own sector level issues, earnings issues, capital allocation issues. And now they have become reasonably valued. Because last 2-3 years pharma companies are relatively remained sideways, or some of them even corrected. So that is one sector where we are able to find good businesses at the low of a business cycle. So these two sectors have a fairly large in our portfolios.

BT: What asset allocation do you recommend to investors?

Kalpen Parekh: Each person asset allocation has to be different. This is a very personal matter, there is a saying that ‘personal finance is more personal and less finance.’ In my case, personally, I am a very long-term investor, I invest for, you know, decades, my first investment in the fund industry was in 98. And that investment still remains I have not touched it.

And secondly, I'm a very conservative investor, I don't like to see very sharp falls in my portfolio value. Because I started my career in 99 - 2000, after we there was a very sharp technology-led crash globally and in India. So, I generally don't like to lose a lot of capital. So, I'm more conservative personally as an investor. And the third point I mentioned is markets are slightly more expensive than they deserve to be, they are not very cheap, they are not very expensive, and they are marginally, overpriced.  And last, the other point is, interest rates are higher than what they were 2-3 years back. So keeping all this in mind, my portfolio is today well spread out, around close to 50 per cent of the portfolio is, is in Indian markets, around close to 30% of the portfolio is in fixed income, and around 10% is in global funds and 10 per cent is in gold. So, it's fairly spread out plus or minus five percent here and there are similar in that but it is across all these four asset classes meaningfully.

BT: Is locking your money in longer term debt fund is a good idea right now?

Kalpen Parekh: I personally invest in, in actively managed debt funds, which can go long if required, which can bring duration down if required, they can keep navigating the member for an investor to do it on his own, sometimes this is challenging, because you know, most investors don't track a lot of these variables on a daily basis. It's not a part of their life. So they're busy with their life, their work in their business or their profession. And hence, I feel the next year, or maybe you can use it for long duration one fund and then again, there could be a phase when it's better to go to short duration bond fund. So instead of constantly moving in and out of different debt categories, I personally prefer to invest in active funds, which can navigate the investor and take care of different features of interest rates.

Capital gains tax on debt funds has gone away. What is the strategy of the of the mutual fund companies from here on? Are you planning to launch some new products?

Kalpen Parekh: I don't think we need to launch new products because there are already a lot of products which are available in the mutual fund categories. And I think one product which is never got its due, is the equity savings fund category. So, I personally like this category or this product a lot. I invest myself in that it is a hybrid category, where around between 40 to 50 per cent of the portfolio is in equity as an asset class. And the balance of the portfolio is in fixed income and arbitrage as two components, which generally reflects the interest rate, prevailing interest rate in the market. So, it gives you a combination of debt and equity, and is also reasonably tax efficient if you hold it for a longer enough time. So, I think that category makes equal or more sense.

The dynamic asset allocation fund category, which has become very popular over the last few years, again, makes equal or more sense, because, one it cushions the volatility of the market, and also gives you exposure to fixed income in a more tax efficient way. Another hybrid fund category, which was very popular a few years back, but somewhere lost is the equity and bond fund category or what was earlier called the Balanced fund category, where Rs70 is always in equity and Rs 30 fixed income.

So, if I wasn't interested earlier, I was doing my certification separately 70 equity funds and 30 debt funds. I can still today do the same by combining it for equity and bond fund, which has a mix of 70-30. Or if I want 40-60 exposure towards equity and debt, I can use the equity savings fund. So, I think there are many categories available today in the fund industry. And hence, you know, primary focus has to be to, you know, make investors aware of that, versus launching your funds. We don't need.