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

Kalpen Parekh, managing director and chief executive officer of DSP Mutual Fund, considers himself to be a conservative investor who gives utmost importance to asset allocation.

“If any portfolio has a reasonable mix of thoughtfully put-together asset classes or underlying funds, then it cushions volatility. That is what I do with my portfolio. It reduces my anxiety levels since I don’t have to keep watching my portfolio all the time and make changes as and when there is a market correction,” said Parekh during an interaction with Mint.

Parekh, who parks his incremental savings entirely in the schemes of DSP MF, depends on hybrid asset allocation funds to alter the exposure to equity asset class based on how attractive or expensive the valuations are in the market. “The rules-based asset allocation funds maintain a minimum amount in conservative asset classes and will be put to use when sharp corrections happen in the market and vice versa, which I may not able to do by myself,” he added.

Parekh shared his personal portfolio details for the special annual Mint series Guru Portfolio. The series, which started in 2020, tries to understand the impact of the pandemic on the personal investment portfolios of leaders in the financial services space. 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. As of today, I have invested 39% in equity funds, 24% in hybrid funds, and around 17-20% in debt and global funds each.

I want to be a long-term investor and get the benefits of compounding. The biggest enemy of compounding is volatility. We tend to act and make changes to the portfolio whenever there is volatility and this may not be effective. To avoid that, I believe mixing asset classes in a logical framework is important. If a portfolio has a reasonable mix of thoughtfully put-together asset classes or underlying funds, then it can cushion fluctuation and volatility well.

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

How is the allocation to hybrid funds helping your portfolio?

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

We need to create those cushions in our portfolios for this purpose and the best products that can do so are active asset allocation funds or even static asset allocation funds. Because, they have a minimum allocation to conservative asset classes, which can be put to work whenever sharp corrections happen.

In 2020, when the markets fell 40%, the dynamic asset allocation fund that I invested in increased its equity exposure from about 30% to 80% of the portfolio. Had this been left to me, I may not have had the courage to take that decision.

What’s your approach to equity investing?

In equity funds, my investing strategy is predominantly style-driven. It has a mix of funds with two complementing styles.

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

A third of the DSP Value fund’s portfolio goes global and thus it straightaway solves my global investing requirement as well in a more tax-efficient way.

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

What’s your approach to debt investing?

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

In the last few years, my exposure was more towards lower-duration strategies with investments in the DSP Short Term fund and DSP Savings fund. The weighted average maturity of these funds was earlier around one year, which is now about three years.

But in February 2023, with interest rates coming closer to the higher side of the range, I have gradually started adding long-duration funds to the portfolio. I invested 10% in our strategic bond fund, which is an actively managed long-duration fund.

My hybrid funds also have debt exposure. That’s a more tax-efficient manner to invest in fixed income (hybrid funds having more than 65% exposure to equity, including arbitrage, will be treated as equity funds for tax purposes—10% for long-term investments instead of tax at slab rate of individuals).

(Parekh said he did not change his debt portfolio because of the recent changes to the taxation of debt mutual funds, which no longer carry indexation benefits for investments starting this fiscal).

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’s your portfolio allocation to DSP funds?

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

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

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

Which side are you on in the argument about buying or renting a home?

I live in Mumbai, which is a very expensive city with rental yields at just around 2%. This is compared to debt funds, where the bond yields are between 7% and 8%, while equity returns are much more than that. So mathematically, I was never able to consider real estate as an investment.

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

Until 2021, I was living in a rented house. Plans of buying a home never materialized in the previous years. In 2010, I went to Philadelphia in the US and lived with my cousin. He had a 6,000 sq.ft house for which he had paid about ₹3 crore. For a similar price in Mumbai, I was offered a small house in an old building.

That is when I realized that I will be blocking a lot of capital which will not be productive if I buy a house. I decided to wait either for a better house or a better price. All through 12 years, that better price did not 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 that I needed a better house.

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

Did you ever face peer pressure to buy a home sooner?

I rarely react to external pressures. I have the discipline to make choices based on what I can afford to do and what is sensible to do.

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

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

Can you share one strategy that has worked for your portfolio in the last one year and one that hasn’t?

The whole year has been muted. Bonds have generated around 3-4%, starting from a low-interest rate regime. Equity markets have been flat, with returns between -2% and 2%, depending on the index you take. My portfolio has given around 3% in the one-year time frame.

Overall, in the last year, what did relatively better was one part of my global portfolio, which is in DSP’s Energy Fund. And the worst came from another part of my global portfolio, which is the World Mining Fund that was down by about 4%.

(Note to readers: Through this series, we try to highlight the basic tenets of personal finance such as asset allocation, diversification, and rebalancing. We do not suggest replicating the asset allocation of Parekh, as personal finance is individual-specific and differs from one person to another.)