Balance sheet of financial firms in best shape ever: DSP MF MD & CEO

Companies are expected to report reasonable earnings growth in the quarters ahead leading to less expensive valuations, says KALPEN PAREKH, managing director and chief executive officer, DSP Mutual Fund. In an interview with Abhishek Kumar, he explains why his fund house has exposure to financial sector companies and names sectors that are likely to do well. Edited excerpts:

What is your outlook on the equity market? What are the factors that will decide the future market movement?

Equity returns are a function of valuations and earnings growth. At present, good Indian companies are neither cheap nor very expensive but some fairly valued pockets do exist. On the other hand, earnings growth has recovered and should do better than the previous decade. In summary, we expect reasonable earnings and less expensive valuations in the coming months. The overall leverage across the world and rising interest rates are a cause for worry. This is a setup we haven’t seen in our careers and we will have to see how this pans out.

With most of the rate hike already done, do you think it's time for investors to reconsider longer duration debt funds?

Investors should slowly start investing in longer duration debt funds as the rate hike cycle could be nearing its end. This is because inflation and currency impact is mostly priced in. Moreover, demand for government bonds would be good enough to absorb the supply either due to purchases by central banks or future expectations of bond inclusion in global debt indices.  

Financials seem to be the present favourite at DSP MF. They have received the highest allocation in most schemes. Why are you so positive on them and which other sectors are likely to do well in the near future?

Financials have the best balance sheets today than at any point historically. We have started seeing some uptick in credit growth. Corporates have been de-leveraging for a long time. Put this together with the comfort on valuations (for select names) compared to other sectors. Essentially banks are proxy for both capex and consumption growth and are available at fair valuations which can be said only for a few sectors in India today. We also like healthcare companies as they generate steady free cash flows in their India business and their global businesses are at cycle lows and should do well in the future. Technology firms are good long-term profitable businesses. After over 20 per cent price correction, we have invested more in them.

If an investor wants to put in Rs 10 lakh in mutual funds now, what would be your recommendation?   

Every investor’s time horizon and risk appetite is different hence I can’t give a single answer for a diverse investor base. However, it's important that every portfolio is well diversified. My own portfolio is diversified across asset classes: 50 per cent is in equity funds, 15 per cent in international schemes, 25 per cent in debt funds and 10 per cent in sovereign gold bonds.

SIP inflows have remained unaffected by the market condition in the last one year, coming in at over Rs 10,000 crore every month. Why do retail investors no longer panic during market downturns?

Investors seem to have learnt the rules of good investing. They are willing to commit capital for decades via SIPs and be collectors of units especially in the phases when the net asset value (NAV) falls. Such investors form the core of these monthly flows and they also benefit over time by adding more units in periods of consolidation.

There seems to be a rush to launch target maturity funds. DSP MF also launched one in March. Why is the industry betting on them?

There are multiple reasons why such funds have garnered interest. For institutional clients, target maturity funds give the benefit of accrual i.e., mark-to-market does not impact the balance sheet. Moreover, target maturity funds give a sense of certainty and can be a substitute for bank FDs [fixed deposits]. Lastly, such funds give a sense of transparency as the index is constituted on predefined rules by an external index provider. Nonetheless the active funds may help in navigating the rates cycle with lower volatility on NAVs. Thus, we expect target maturity funds to garner further interest, yet coexist with other active debt funds.

Apart from equity and debt, what is one asset class that every investor should own?

My approach to asset class ownership is based on parameters that they should conform to. They should be able to beat inflation over decades and help increase one’s purchasing power (equity: India and global). They should also cushion intermittent market volatility (debt). They should have low correlation to equities yet earn more than debt over the long term (I add gold when equities have run up a lot). Hard assets like real estate can also diversify against equity volatility and help beat inflation. Hence, I would look at these four asset classes.

I still prefer the simplicity of equity and debt funds and sovereign gold bonds as they are liquid--can be withdrawn when needed without major impact cost, tax efficient and have low transaction costs.