In conversation with Neil Parag Parikh Chairman and CEO, PPFAS Mutual Fund

Stick To Your Asset Allocation

Since volatility is the name of the present game, Neil Parag Parikh, Chairman and CEO, PPFAS Mutual Fund, shares a few valuable tips for investors to remain afloat

After two years of spectacular return by equity mutual funds, the year 2022 did not start on a good note. How do you see it panning out for the rest of the year?

It is important to remember that returns from stock markets are lumpy. There could be long periods of low to no returns and there could be a short time where one gets superlative returns.

In short, stock market returns are not linear. It would be advisable for investors to tone down their return expectation after a couple of very good years. The era of free money and low interest rates seems to be over. Inflation and oil prices are trending upwards. On top of this, there are geopolitical risks and a lot of uncertainty. All this will keep the markets volatile and return expectations should be toned down to low doubledigit returns in an optimistic scenario.

The latest SIP numbers are very heartening to note. Do you see any correlation between MF returns and these flows? Will it taper with a fall in equity returns?

SIP numbers and flows to MFs have been extremely strong for the last 6-7 years. Post demonetisation and with the financial aspect of savings, a lot of funds have flowed through the MF channel. The overall experience for investors has been good so far. As we have seen in earlier cycles, there are definitely some correlations of strong flows when overall returns are good. Chasing past returns and fear of missing out (FOMO) are human behavioural traits which are hard to change. We could see some slowdown in flows if equity returns are sub-optimal for a significant period. But the overall trajectory of SIP numbers is surely going up.

You have recently stopped accepting investments in Parag Parikh Flexi-Cap Fund due to the limits set by the RBI on investing in foreign securities. When do you expect an increase in this limit and how has it affected the fund flows?  Has it witnessed any unusual redemption?

Logically, the limits should have already been increased and I am not sure why it is taking so long. The last limit increase was done 14 years ago when MFs were in a nascent stage. Things are much different today and I hope the limits are increased soon. Currently, our flexi-cap fund is closed for new subscriptions – lump sum as well as SIPs. Only existing SIPs and STPs registered before February 2, 2022 are going on. We have not seen any unusual redemption. In fact, people are waiting for the fund to open to make their investments.

RBI has still maintained its accommodative stance and inflation is out of RBI’s tolerance band. As such, what will you recommend to debt fund investors?

Though RBI has maintained its accommodative stance in the recent MPC meeting, it remains to be seen as to how long they can continue doing it. One thing is certain that the era of free money and liquidity is over globally. As we see global central banks increasing rates, eventually RBI will also increase the rates. Another thing to note is that growth has been pretty strong across spheres and hence eventually inflation should pick up. Our stance for the debt fund investors has always remained the same – not to be perturbed by these interest rate movements and rather focus on the yields that you will be earning on the investments if you hold them to maturity. It is important to match the duration of their funds to the goal that the end investor has. If an investor is saving for his retirement, he or she should not be bothered by short-term notional losses if interest rates increase and the bond prices fall. Investors should focus on the end goal that they have and whether that can be fulfilled by the fund they have chosen or not.

At present you have only four offerings from your end i.e. liquid fund, flexi-cap fund, ELSS and conservative hybrid. You have been quite selective in launching funds. What is your thought process behind this and can we see any new fund launch in the next few months?

We will be motivated to launch a new scheme only if we can add value to the end investor, if there is a need in the market for a product from our fund house, if we can provide some differentiation or simplification to the category or asset class, and if we are excited to invest our own money in such a scheme. As of writing this, there are no plans to launch additional schemes.

Parag Parikh Flexi-Cap Fund is your flagship product and offered good returns to its investors. What has made it stand out in the category?

We have been following our investment discipline, process and philosophy for more than 20 years – earlier as a PMS and now as a MF. So, the conviction and confidence in our investment approach has always been high. Fund management consistency and discipline is extremely important to take decisive actions on the portfolio. Secondly, we do not force ourselves to invest if opportunities are not available. We would rather remain in cash and wait for opportunities and right valuations. This helped when the market fell sharply and we could deploy our cash at some good valuations. The fund has a go-anywhere approach to investing. We can invest up to 35 per cent of the portfolio in overseas securities. The wide mandate and our investments in some truly innovative and growing global companies have also helped in fund performance.

What is your take on passive investing and should one have it in his or her portfolio?

My personal preference and thinking is that there is still a lot of scope to get better risk-adjusted returns than the benchmark in a well-diversified and well run active equity mutual fund in India. I believe Indian markets are at an early growth stage. Passive funds work well when markets are matured and where it is tough to make alpha or additional returns over the benchmark. Ultimately, one should follow and stick to their asset allocation and financial plan. Active or passive discussion is secondary as it depends on the individual’s comfort to choose a product to reach his or her goals.

Do you believe the introduction of taxation on gains from digital assets will help channelize savings into MFs which are well-regulated?

Irrespective of taxation or no taxation from other asset classes, flows into MFs will continue to stay strong. My belief is that the MF industry will continue to thrive as it is extremely wellregulated and transparent in communication with ease of transacting. It is also tax-efficient and has low costs. The prospects for the MF industry are brighter than ever before!

What would be your advice to retail investors as of now?

• Don’t panic and sell.
• Volatility is part and parcel of equity investing, so don’t get too perturbed by wild swings.
• A lot of times in the markets, inaction is the best action.
• If you want to see the good times, then you must also go through tough times.
• Stick to your asset allocation.
• SIPs are a disciplined way to invest, so don’t stop them. If you have investible funds, then do so in a staggered fashion.
• Equity investing is for the long term – minimum five years so do not allocate any money in equities if you require the money within five years.