SIPs may slow, but investors unlikely to give up without a significant correction: Kalpen Parekh

Summary

SIP flows remain resilient, but prolonged weak returns could test investor faith, says DSP MF's Kalpen Parekh, who advises focusing on time horizons, asset allocation and downside risks.

SIP flows have proved remarkably resilient, but that resilience could be tested if equities disappoint for years, says Kalpen Parekh, MD & CEO of DSP Mutual Fund. He said, "Flows are difficult to forecast, and if an asset class disappoints investors for five, six or seven years, some of that resilience could weaken."

While some investors may stop SIPs as tenures end or returns disappoint, a steady stream of new investors continues to enter, helped by rising employment and stronger faith in SIPs and equities.

"SIP growth may not continue at the pace of the last five years, but I don't expect investors to give up unless we see a significant market correction."

For markets, Parekh sees the bigger risks in a sharp spike in global interest rates or oil prices, particularly if the West Asia war escalates. Barring that, valuations across banks, insurance and technology have come closer to fair value, allowing the fund house to deploy money in these segments.

Edited excerpts:

How do you see the coming Samvat year for markets and investors?

One-year returns are random. Can be anything - high/low/negative.

At the same time, the economy is doing fine. Auto and cement sales are rising, power demand is steady, and there is spare capacity in the economy. These suggest that demand is healthy without creating excessive pricing pressure. The key risks are a sharp rise in global interest rates or oil prices, particularly if the West Asia war escalates. Otherwise, valuations have already come closer to fair value in banks, insurance cos, tech etc and we are able to deploy money in these segments.

What should investors do after the recent underperformance of Indian equities?

Around 90% of investors have monthly cash flows, so their investments also tend to be monthly, or SIPs. If you are in the accumulation phase, this phase is allowing you to increase the number of units purchased every month. For a collector of units, early phase correction is a blessing. As a fund house, our intent is to create investors, not consumers.

Equity fluctuates and earns about 4-5 percentage points more than bonds over the long term precisely because of that volatility. Markets can move sideways for years or fall 20-30% without warning. Your time horizon should determine your allocation. If you need the money within six months, you should not be in equities; if the need is 10 years away, equities make more sense because bonds may not beat inflation.

If you understand volatility, invest when markets fall or move sideways rather than getting overly excited when they rise.

How should investors approach asset allocation?

Around 40% of my own portfolio is outside equities -- in bonds, debt funds, hybrid portfolios, gold and precious metals. Weak returns are disappointing for existing investments, but they create an opportunity for new money to be deployed at lower NAVs. When markets rise, existing portfolios benefit but new money becomes more expensive; when they fall, existing investments disappoint but new money gets a better opportunity.

Ultimately, asset allocation depends on your time horizon and appetite for volatility. If you cannot tolerate temporary capital losses, bonds, debt funds or fixed deposits (FDs) may be more appropriate. Those comfortable with some volatility can combine equities and bonds through asset allocation, hybrid or multi-asset funds. Your asset allocation is a function of your context -- your goals, risk appetite and current phase of market.

What are the biggest mistakes investors make?

The first is investing without anchors -- based on someone else's view rather than your own needs, time horizon and risk tolerance. Another common mistake is chasing past performance and investing what has run up a lot. A fund that delivered 25% last year gave that return to investors who entered a year ago, not to someone investing today.

First decide your time horizon. For short-term goals, use conservative options such as fixed income or arbitrage; for long-term goals, equities make more sense. Then ask whether the asset class is in a bubble and, importantly, whether you can tolerate a year or two of poor or negative returns. That is the nature of equity.

The third mistake is investing extensively in direct stocks without knowing enough about the underlying businesses -- metrics like ROE, growth rates or cash flows -- and investing simply because someone told us about these companies or because the stocks have done well recently. Such an investment approach relies on luck and carries the risk of permanent capital loss.

How should investors choose from the thousands of mutual funds available?

Find a good advisor. If you don't know how to choose one, start with a simple index fund rather than chasing the hottest thematic fund. And don't look only at what an asset has earned; ask how much it can lose.

For example, if you have a three-year horizon and need the money for a house, look at the worst three-year outcome. If a ₹100 investment could temporarily become ₹60 and you cannot absorb that loss, you should not take that risk. Investors often focus on CAGR but ignore the downside required to earn it. A small-cap fund may have delivered an 18% CAGR over a long period, but could also have suffered a 67% decline. Both numbers matter.

If you understand the downside you have to live through to earn the upside, you become a better and more prepared investor.

Does gold still make sense as a diversifier after its strong rally? How much is too much?

Gold has historically had a very low correlation with equities, which makes it a useful diversifier. But it is also volatile and can fall 50-60%, so calling it a "safe haven" can be misleading over shorter periods. My approach is to moderate exposure after a long upcycle rather than exit completely and use SIPs instead of lump-sum investments.

Personally, I have reduced gold from 22% of my portfolio to around 13%. Given the current geopolitical uncertainty, I'm comfortable with that allocation. For investors who cannot time such moves, a multi-asset fund is an option.

Can SIP inflows remain resilient despite weak market returns?

Flows are difficult to forecast, and if an asset class disappoints investors for five, six or seven years, some of that resilience could weaken. SIPs can also decline when existing tenures end or investors stop them because of poor returns. But new investors continue to enter as more people get jobs and salaries, and confidence in SIPs and equities is higher than it was in the past.

So, my answer is somewhere in the middle. SIP growth may not continue at the pace of the last five years, but I don't expect investors to give up unless we see a significant market correction.

Importantly, SIP is a mechanism, not a guarantee of returns. Its benefit is discipline - it ensures investors keep buying through both high and low markets. The path markets take also matters: if markets fall first and recover later, SIP returns can be better because more units are accumulated at lower NAVs.

Which is better in the current market: flexi-cap, hybrid or multi-asset funds?

I am a moderate-risk investor, so my portfolio is currently around 65% equities and 35% bonds and gold, which is similar to a multi-asset allocation. My SIPs have been going into multi-asset funds for the last two years. If valuations reset further, I may move towards a more aggressive equity allocation.

For a very long-term investor who can tolerate volatility, a flexi-cap SIP can work. If you cannot digest high volatility, multi-asset or aggressive hybrid funds are more appropriate. The product should reflect how much fluctuation you can bear.