Why DSP MF’s Kalpen Parekh bought a home in Mumbai

“If a portfolio has a proper mix of discreet asset classes or underlying funds, it reduces volatility. That’s what I do with my portfolio. It lowers my anxiety level because I don’t have to watch my portfolio at all times.” No need to watch and make changes when the market improves,” Parekh said during an interaction Peppermint,

Parekh, who parks his incremental savings entirely in DSP MF’s schemes, relies on hybrid asset allocation funds to vary the exposure to equity asset classes depending on how attractive or expensive the market valuations are. “Rules-Based Asset Allocation Funds maintain a minimum corpus in conservative asset classes and will be used when there is a sharp market correction and vice versa, which I would not be able to do myself,” he added.

Parekh shared his personal portfolio details for the special annual mint series Guru Portfolio. The series, which debuted in 2020, seeks to understand the impact of the pandemic on the personal investment portfolios of leaders in the financial services sector. Edited excerpts from the interview:

Tell us about your asset allocation.

I am a conservative investor and for me, not losing capital permanently is a priority that comes before earning the highest returns. Till date, I have invested 39% in Equity Funds, 24% in Hybrid Funds and around 17-20% in Debt and Global Funds.

I want to be a long term investor and take advantage of compounding. The biggest enemy of compounding is volatility. We act and make changes to the portfolio whenever volatility occurs and it may not be effective. To avoid this, I believe it is important to mix asset classes into a logical framework. If a portfolio has an appropriate mix of thoughtfully placed asset classes or underlying funds, it may well reduce volatility and volatility.

The value of asset allocation is appreciated only when there are sharp market corrections. Between 2008 and 2020, when there was no sharp movement in the market, the asset allocation would give you a feel that your portfolio was not performing as fast as the rest of the market. But this perception may have changed in 2020. Therefore, paying attention to asset allocation is not an easy choice, but it is an important one.

How is allocation in hybrid funds helping your portfolio?

A common phrase used in the markets is that when there is blood on the streets, we should invest more. But most of the time, we do not realize that when there is blood on the streets, it will be our blood too and we will not have money to invest further.

We need to create those cushions in our portfolio for this purpose and the best products to do so are active asset allocation funds or even stable asset allocation funds. Because, they have minimal allocation to conservative asset classes, which can come in handy if there is a sharp correction.

In 2020, when the market fell 40%, the equity exposure of the Dynamic Asset Allocation fund I was invested in increased from about 30% to 80% of the portfolio. Had it been left to me, I might not have had the courage to take that decision.

What is your approach to equity investing?

In equity funds, my investment strategy is primarily style driven. It has a mix of funds with two complementary styles.

One, I invest in a fund with high quality companies that have major growth and quality. To complement this, I invest in other funds with companies of reasonable quality – where valuations are supportive even if growth is moderate. These are the two broad templates that I follow and invest primarily in DSP Flexi-Cap and DSP Value Fund.

One-third of DSP Value Fund’s portfolio becomes global and thus directly addresses my global investment requirement in a more tax-efficient manner.

In the mid and small-cap space, my bias is to invest only when there is a sharp correction or through the SIP (systematic investment plan) route.

What is your approach to debt investing?

I have a general rule of thumb when it comes to investing in debt. When interest rates are low, I go for short-term funds and when interest rates go up, I invest in long-duration funds.

Over the years, my exposure was more towards short term strategies with investments in DSP Short Term Fund and DSP Savings Fund. The weighted average maturity of these funds was around one year earlier, which is now around three years.

But in February 2023, with interest rates moving closer to the higher side of the range, I have slowly started adding long term funds to the portfolio. I invested 10% in our Strategic Bond Fund, which is an actively managed long term fund.

My hybrid funds also have debt exposure. This is a more tax-efficient way to invest in fixed income (Hybrid funds with more than 65% exposure to equity including arbitrage will be treated as equity funds for tax purposes – rather than taxed at the slab rate) for long term 10% of individuals for investment).

(Parekh said he did not tweak his debt portfolio due to the recent changes in taxation of debt mutual funds, which no longer offer indexation benefits for investments starting this financial year).

What is your exposure to gold?

Apart from holdings in sovereign gold bonds, half of my 17% exposure to international funds is in gold mining funds.

What is your portfolio allocation in DSP funds?

For the last few years I have been investing only in mutual funds and that too in DSP.

At DSP, we have a rule that all our savings should be invested only in our own schemes. We follow this practice to achieve better alignment with our investors.

Currently, around 85% of my entire portfolio is invested in DSP schemes. The rest of the portfolio is of investments made before I joined DSP.

Which side are you on in the dispute of buying or renting a house?

I live in Mumbai, a very expensive city with rental yields of around 2%. This is compared to debt funds, where bond yields range between 7% to 8%, while equity returns are much higher. So mathematically, I have never been able to consider real estate as an investment.

Having said that, I bought a property in Mumbai in 2021. This gives me the emotional pleasure of having my own home.

Till 2021 I was living in a rented house. Plans to buy a house over the years never materialised. In 2010, I went to Philadelphia in the US and stayed with my cousin. He had a 6,000 sq ft house for which he paid 3 crores. I was offered a small house in an old building in Mumbai for the same price.

Only then did I realize that if I buy a house, I will be locking up a lot of capital which will not be productive. I decided to either wait for a better house or a better price. During the 12 years, that better price didn’t come at all. I continued to invest my savings in equity and debt. During the Covid pandemic, living in a small house and doing video calls most of the time, I felt I needed a better house.

Within a few months, I found a good house and the timing coincided with the euphoria in the equity markets. I booked profit on my equity holdings and bought a house in 2021 (without any loan).

Have you ever faced peer pressure to buy a house early?

I rarely react to external pressures. I have the discipline to make choices based on what I can do and what makes sense to do.

In 2001, I promised my wife that we were moving to a bigger house. I fulfilled that promise after nine years but through a rented house.

There was always an expectation from my parents and my wife about buying a house. But I am grateful that there was no undue pressure to take that decision.

Can you share a strategy that has worked for your portfolio in the last one year and no one else?

The whole year has been silent. Starting with the low-interest rate regime, bonds have yielded around 3-4%. Equity markets have been flat, with returns between -2% and 2%, depending on the index you pick. My portfolio has given around 3% returns over a one year time frame.

Overall, in the last year, a portion of my global portfolio which is in DSP’s Energy Fund has done relatively well. And the worst came from another part of my global portfolio, the World Mining Fund which was down almost 4%.

,Note to Readers: Through this series, we attempt to highlight the fundamentals of personal finance such as asset allocation, diversification, and rebalancing. We don’t suggest replicating Parekh’s asset allocation, because personal finance is individual-specific and varies from person to person.,