The Mutual Fund Show: Lessons From A Challenging Year To Make Samvat 2079 Better

Radhika Gupta: I think the old learnings worked Niraj, truly the old learnings worked, the old mantra around asset allocation, sticking to your asset allocation around asset classes, finally rewarding.

I think, that is the real learning from this Samvat and I honestly feel that we don't want to discover new learnings every year. We honestly need to revisit old learnings and make sure we truly learn them.

Kalpen Parekh: My key learning is coming on your show every Diwali for last many years is a certainty, is reasonably predictable. But markets remain unpredictable, and that lesson gets reinforced every year.

I think, the last year again highlighted that no one knows, almost nobody knows the future, everyone has opinions and views, but more often, the future is very different than what is discussed. So, whether it is central bankers, policymakers, money managers like us, politicians, everyone had views on many things, and what played out was very different and that makes me conclude again and again that nobody knows the future.

All we need to do is to ask this question, how much of the uncertainty is in the price and is there margin of safety or not? and if yes, then build your portfolios accordingly. If not, then reconsider risk and don't bet your hard-earned money. The lesson to myself is, don't bet my hard-earned money on trying to have many interesting long-term forecasts.

Kalpen Parekh: If you look at broad asset classes, where we as money managers invest our or your money- in equities, bonds, global equities, and gold. And if you look at it, almost the winner in the last one year was actually gold.

Gold did better than equities, equities were almost flat; Nifty is down 1.5-2% for the last one year. Bonds are flat-to-negative because rates have risen very sharply. That was not so much of a surprise because the interest rate was so low, and it was a matter of time whether they would rise, in the next six months or next two years, but that was bound to happen.

Global equities, which was the flavour of last year, actually slowed down. Also, not so much a surprise because we were always talking about the fact that it is sitting at a 10-year high, at some point in time consolidation will happen.

I think what surprised us was the speed at which central banks changed stance and you know, took away that comfort or the complacency that we are here always to you know backstop, that changed dramatically and the speed of rising policy rates reflecting in bond yields going up was a surprise.

The dollar strength much higher than what was expected and the fact that it continues. And of course, you know, one very big surprise was what happened with Russia and Ukraine, because in many decades now, we have not seen a country invading another country and you know, taking almost the world to the brink of a war. So, those were very unusual outcomes.

What was not a surprise was, you know, commodity prices scaling up extensively because coming after a decade of very low investments in you know, capacity on the energy side, under the liberalisation of ESG trends and so on and so forth. Now, when those stocks have started doing well, there is a new narrative that ESG should be more nuanced and more balanced. So, these are some of the points that moved, you know, differently than what I would have expected.

Radhika Gupta: I think extending from what Kalpen said, you know, the speed of the post-Covid rally and then the quickness with which everything reverted. I would say, the private markets really, really surprised me. Private markets and public markets are not delinked from each other. I mean, one of the learnings over the last two or three years is really countries, economies and markets are much more closely linked.

What sort of bubble that happened in private market all the way through some mega listings, and the speed at which that turned around because of rates rising, the way they did, I think, that was a surprise and that very suddenly changed the sentiment even in listed markets, international investing, tech IPOs, new age asset classes like cryptocurrency.

So I think, the speed of everything, you know surprised me and I think one of the learnings is perhaps cycles are also getting shorter, we have been brought up on a diet that maybe 5-7-8-year old cycles, I think cycles are getting sharper, and a lot more intense.

Radhika Gupta: I would say not significantly. I think one thing that I do try and do is, that when equities correct, I do try and add to equities, particularly on the mid and small-cap side. So, whenever there is that correction opportunity, that's something that I look to add, but otherwise, I think it has been status quo.

It has been continuing to do SIPs and use dynamic asset allocation funds and I really think that it has been such a volatile year, that is probably been the approach that has worked in terms of mental peace, in terms of the fact that nobody can really predict anything. So, outside of adding a little bit to equities on the mid and small-cap side and I am selectively looking at gold and silver as investments.

Kalpen Parekh: I have always said that, you know, I look for an asset class which is correcting or falling to get excited about investing my long-term money. Otherwise, in the middle, I don't like to act at all. In the middle, just let your funds and fund managers and the companies in which we invest take care of compounding.

So, you know, I was let's say, underinvested in, you know, global companies through global funds, whether in US or the rest of the world, and the last four-five months gave an opportunity to start to increase our exposure there because, you know, we have seen a 20% sort of correction in some very marquee businesses and on the other hand, Indian markets have reasonably remained stronger.

So, while they have not made money, they have held on. So, I have increased my exposure to global funds by around 7-8% all the way up to 16-17%. So, that's one big shift that I have made, and I want to reinforce what Radhika said, that one reason why intermittently when debt and equity fluctuate so much, while ending the year doing nothing.

We don't need to do much because the dynamism of asset allocation funds, they actually came to work in the last 12 months, where they rebalanced themselves beautifully between both the asset classes, thus leaving us to focus more on our work and not worrying about whether we will invest in the right time or get out at the right time. I think, it makes our investing life very boring, when funds take away the mantle of doing formula-based investing.

Kalpen Parekh: Markets fluctuate, having said that, since I need to articulate a little bit more to sound more intelligent, I feel that you know, interest rates and maybe I have this very simplistic framework, which does not work 25% of the times but it has worked for me 75% of the times. It doesn't have too much intelligence in it, but the framework is as follows- in India, interest rates fluctuate between 6% to 9% in long-term 10-year bond yields. Currently, we are in the middle at 7.5%. So, you know, we are closer to the long-term averages.

But you know, there are tailwinds, because of currency, because of deficits, because of, you know, policymakers wanting to invest in global uncertainty, rates will start drifting higher, they have already drifted higher significantly, but they will continue that drift for some more time and that will make fixed income more appealing.

So, one year back when you parked money in fixed income by not being in equity for example, you know, we earned 3 and 4% return. But today, these portfolios have come up closer to 7-7.5%, closer to 7.75% also. So, the parking lot is now more conducive for money, though rates may drift a little bit higher, but the fixed income becomes, you know, reasonably meaningful after a span of two or three years.

On the other hand, while you know, equity valuations are still on the higher side, I also know we are in that cycle right now where sort of debates on valuations don't matter anymore, something else matters. Last time has taught us that eventually gravity comes back, and common-sense rules come back. So, you know, thankfully there are many sectors of great companies which have corrected extensively in the last six to nine months, you know, debt stocks are down, healthcare stocks are down, banking stocks for last three or four years have gone away. The credit cycle has just started to pick up. So, somewhat equity is also in the middle and hence, I think, you know, some part of that froth of the market from both asset classes has moved out.

Global Equities also a lot of froth moved out, whether you look at global tech companies or Europe and Asia have been completely decimated. Emerging markets are no longer talked about, 10 years back they were like the shining star and BRICS was a popular word. Today, no one talks about them. So, there are pockets now which are emerging for one to start calibrating risk and I feel there are more opportunities now than what they were one year back.

Radhika Gupta: So, I have two takes on this and I really can't look at it with even one or two-year horizon. So, I think if you look at India, we feel that India's economy relative to the chaos in the rest of the world is better placed, at least from a three-year point of view. I think if you look at core economic indicators today, if you look at some of the important drivers, whether it is private capex, whether it is some of the reforms-driven capex, there is a lot to be positive about.

And even some of the things that are structurally challenging, for instance, inflation in India is a problem, but it's not an extent of problem compared to the US, where they haven't seen inflation like this in decades. So, I think from the core Indian economy point of view, there are many reasons to be constructive over the next two, three years.

I think certainly from a fund point of view, there are many exciting themes, and we are very excited about PLI and manufacturing driven stories. We are very excited about private capex. That said, I don't think India's economy or markets will be isolated from the global turmoil ahead of us. So is it a glorious Samvat ahead, you know, is it all rosy and it's hard to say that. I think it will be a volatile six to nine months, at least we have certainty about how much interest rates rise ahead of us.

Radhika Gupta: No, the market has always been about ‘unknown unknowns.’ Investing has never given you a perfect set of circumstances, either the macro is not perfect, or the valuations aren’t perfect or something else isn’t perfect and secondly, ‘unknown unknowns’ are the reason that there is alpha to be made.

Radhika Gupta: Okay. You know, I tend to be a more conservative investor but despite being a conservative investor, today if I had to choose, I will probably be 60% large-cap and 40% mid and small cap.

In normal course, I would probably be closer to 70-75% large-cap, today my tilt being a conservative investor, is mid and small-cap biased. I do think that with the corrections that we have seen in particular pockets, very interesting stories are emerging on the mid and small-caps side.

Kalpen Parekh: I don't believe in market cap investing at all. My principle is investing in companies at good prices, not driven by the lens of a market cap. The market cap-based lens of investing is just more like dissecting or granularizing the principle investing of equity, which is buying good companies.

So, I have always built my personal portfolio around that dimension, which is why most of my investments are in market cap-agnostic funds, or even country-agnostic funds. So, I choose funds, which are based on rules and the rules are only to avoid the ruin of bad companies and avoid the ruin of overplaying.

Any portfolio which follows these two principles, and because of that, if the underlying is 20% of small-caps or 50% of large caps, so be it. So, I just want to reinforce that message that the market cap-lens is sometimes is very challenging. And just one more thought that I have is that, if we look back at the headlines in 2007-09, very similar narratives and stories were dominating, and you know, small-caps and mid-caps have a lot of speed and energy, they can make more money faster, and so on and so forth.

I have learned some of these lessons, whenever I got trapped in the growth narrative, it has not made money for me. I am a bit more conservative from that lens, and hence, from the market’s perspective.

Kalpen Parekh: When I just intuitively think about it, the tilt still will be you know, 60-70% large-cap because like I said, 20% of my portfolio is now also global portfolio and that may end up being much bigger and the balance 25-30% will be mid cap. I still have 25% in fixed income, if you take that out, the tilt will be 60% towards large-cap and 40% towards the rest.

Kalpen Parekh: In the last one year I think, October 2021 is when Indian markets hit its peak and since then, till June 2022 in the next nine months, they fell by 18%. So, this was a period where my asset allocation funds, like every other, increased its tilt towards equity by around 20% and I also added a little bit more to equity.

So, over the whole year, I would have moved around 7-8% from fixed income into equity. So, if my fixed income was 32-33% last year that has come down to around 25%.

Kalpen Parekh: I am not finetuning it as much because I guess I have seen interest rates at 9% also, now I don't know whether we will go there or not, usually 7.5% and the journey from 7-8% can also be a bit painful, from returns perspective.

So, what I am doing right now, for every new money that I get from my salary, I am investing in 50-50 proportion. So, you know, there is a very fundamental thought behind it, when I look at the entire AUM of our fund industry, roughly 50% in equity and 50% is in fixed income and, you know, I myself as an investor when I tried to do my own 50% in equity, 50% in index separately and tried to time it, I realised my final returns are lower than even a passive fund. So, it's better to invest in a structure which is always going to be 50-50.

So, in this phase, like I said that, you know, fixed income has become more attractive than in the past, but not the most attractive. Equity also has, you know, corrected relatively to the past but still not very, very cheap. It is better to be somewhere in the middle and let the structure take over.

So, I have a fund where I am putting all my money which doesn't have very attractive growth drivers or it will not shoot the light out, but it will be a good parking lot for the next two-three years, till a lot of these global uncertainties and interest rate reversals settle down, inflation settles down.  

So, if stocks do well my 50% portfolio will do well, if they don’t do well, I will feel good that I have 50% in fixed income, which is defending, so that is the simplest approach. This may lead to the same static asset allocation because all the money is going in for 50-50.

Kalpen Parekh: This is a category called equity savings fund where, by mandate Rs 40 goes to stocks, Rs 10 goes to REITs which will give you a slightly higher carry, Rs 15 goes to arbitrage and the balance of Rs 35 goes to fixed income and it enables you to add around 10% equal to the global stocks.

So, it takes care of you know all the four broad asset classes that I like, but instead of me doing it, the fund does it on its own and at higher valuations, the fund also has some bit of hedges on that. So, it's a very tax efficient version of a proxy to a hedge fund.

Radhika Gupta: I do my fixed income allocation through balanced advantage funds which has been a big proponent of the category. So, at any given point in time, 60-70% of my portfolio is BAF. So, that broadly means that you vary between 40-60% equity what I was last year and that works. It's also very, very tax efficient.

I was also probably 50% equity because the BAF moved up and down last year and I intend to be that way. I don't use standalone fixed income investing because I have a home loan and so many people who have home loans including many viewers, the debt math doesn't make sense. That said, for a lot of viewers, and for a lot of people not in that situation, is this a better time to invest in fixed income in my view than it was last year? Definitely. I mean, the simple argument is that, when you want to book your FD? when rates rise or when rates are low.

So, I think with the rising rate environment and where we are today, this is a better time than many a time to do long-term fixed income investments and in fact, you know, we are considering doing that for some of our portfolio, but I don't invest in fixed income standalone I use BAF, which worked really well. I was looking at a one-year target maturity fund, on that 7%, I was looking at a 15-year target maturity, and that's close to 8%. So, not a bad time to look at fixed income in that sense.

Radhika Gupta: I was looking at overall rates, it's spiking well above the 8% handle. For most Indians, it has gone from 6-6.5% to 8-8.5%. So, that's just something that you want to think about this year. 

Kalpen Parekh: I finally bought a house last year and this was in July and August when our markets were booming, and everything looked very rosy and there was huge temptation of taking a home loan and continuing with these investments. But you know, long-term wisdom prevailed that if you want to sleep peacefully, avoid as much debt as possible.

So, I did not take the home loan and rather redeemed my investments from equity, a little bit from fixed income and bought the house. Now in hindsight, it has given me you know, much easier night and it goes back to the first principle of personal finance that you know, what returns markets will give whether equity or fixed income is going to be unknown, but what interest we have to pay is finite.

So, you know, the first tool is, it is okay to redeem some of your money when markets are rising or asset classes are peaking, and reduce some of your liabilities, rather than being greedy about it. So, I completely endorse what Radhika mentioned.

Radhika Gupta: This is where you guys are going to make fun of me, but I want to give the answer everyone expects me to give. Though the product isn't this Samvat, it's an older product but I really think that target maturity fixed income funds found a mojo in this Samvat. And what I have never heard about back in 2019, when we had our first conversations around Bharat Bond, it was a struggle to convince people why you even need the category, and come to today, and I think these are being used like khakhras, no offence to khakhras.

I really think that consumers have started to understand and discover that in a fixed income mutual fund, you can get a predictable simple debt experience. That is FD like, where the quality of the portfolio is good, and now people know that, today, the MF industry offers fixed income solutions all the way from 2023 to 2037. That is a full yield curve of tax-efficient, liquid, high quality fixed income investing at a cost of 10 to 15 basis points. I think, that's pretty disruptive.

It's a Rs 1.2 lakh crore category today. I think, it was half the size last year and I could put money that this will be doing Rs 2.5 lakh crore next year. 

Kalpen Parekh: Let me make a confession, two years back when Radhika and we were on a panel and there was a discussion about these target maturity funds and Bharat Bonds and I told Radhika these funds were already available, what’s new in this? But I think, you know, what really worked is the simplicity of it and the fact that you are able to give different tenors to investors depending on their time horizon.

So, not making fun but inspired by you, we are launching many more so that your Rs 2.5 lakh crore target for the industry get fulfilled. I always tell her that these products were always there, but the way they have got positioned in the last one year, really brought simplicity and ultimately, the beauty of the fund industry is that it has everything that an investor can ask for. But it comes with a lot of its own jargon and complexity, I think the whole concept of target maturity fund is a brilliant design when started with what Edelweiss did and then the rest of the industry picked up.

I feel another product that I personally like a lot, which is a fund which invests you know, agnostic to countries or geography. So, this is the fund where Rs 70 is an Indian company and Rs 30 rupees goes to global companies. So, you are basically buying good companies of India and the world and 70:30 tilt and it gives you tax efficiency of an equity fund. So, it basically helps you in postponing tax for long, but it helps you in participating in good Indian companies as well as global companies and I feel that, you know, the whole principle of diversification is respected here. So, that's a personal favourite that I have.

There are very few funds in the industry with this type of design because what tends to happen is that, when global stocks do very well, people like to invest only in global funds. Nothing wrong with that, you can do independently. And when global stocks don’t do very well, everyone would want to invest only in India, but a design like this allows you to constantly rebalance and keep adding what is going through a down cycle and you know, we have looked at history for last 10-20-25 years, since the time data is available, this combination of blend reduces the volatility to some extent, but still gives you similar long-term return of equity as an asset class. So, we call it the DSP value fund. I personally like that category also quite a lot. 

Kalpen Parekh:  I will always say that you know, what has to be stopped should start from me rather than anyone else, not the industry, not the advisors. It has to be work which I do, and which is in my control, and I do feel that at times in the quest of educating or informing our viewers or investors or advisors, we give a lot of continuous inputs and these inputs actually, you know, they are like the WhatsApp notifications, which may want to make us act.

And good investor is long time investor, a good investor is a notification-free investor, so that you can let your money compound and get out of the way. What has happened over the last many years, you know, with the advent of networks and social media, and all of us getting a chance to express so much, in every meeting we may express five new ideas, which leads to confusion in the minds of the consumer. So, where do we find the right balance between, you know, the right intent to educate, but at the same time, not create an intent to unnecessarily act because money after all is made with time. The longer the time horizon, the better the returns are.

So, I think in a nutshell, simplify the messaging, keep messaging common to actionable principles and messaging, which allows you to enjoy a 15-hour flight, where only during take-off and landing you have to do something, in between there is no need to do something, so only during market extremes, you know, come in give inputs towards rebalancing but otherwise, stay put.

Kalpen Parekh: I think, we all are doing it with very good intent. To say that now healthcare looks good, now the banks look good, now interest rates look good, but you know, what I also realise is that, you know, 95% of our investors don't have money every day to react to every you know, your WhatsApp recommendation.

So, it's good that you know, if they build a long-term portfolio of wealth creation through equities, a little bit of fixed income to cushion volatility, and then apply, you know, personal goals and time horizons. I think, that is a bigger solution that will help, and I think with time we will all evolve because, you know, even if I look at my peers, the intent is to ensure that investors make money.

Radhika Gupta: Look, I don't question intent, but I think we have lots of products out there and we keep launching all of them. I think we have everything it needs, and I know people launch things for their own reasons, but I think this focus on product launches, especially at the top of the cycle and more focus on educating people how to use products.

I think mutual fund products in some way are like Legos, all the building blocks are there, you now need to show people the vision of what you can do with these Lego pieces, to solve real portfolio problems.

We have lovely debates on things like active and passive and all this stuff but nobody wakes up in the morning thinking today I want to go plan to invest in a passive fund, today I want to try and generate 3% alpha over the benchmark. People are out there living their lives, money is an enabler for goals and purposes.

I think, shifting the conversation from products, launches, to how to use these Legos, to lead a very, very simple existence. I think, a lot gets lost in the complexity of conversation and I agree, and I think, it starts with all of us.

So, the big debate is, we have an internal product committee, which is where we take products before launching and then we probably reject five products for every two that we launch, because we keep asking ourselves this question, are we doing this to make us happier or is this solving a genuine consumer problem, that has not been solved and let's just go back to solving the genuine consumer problem.