Flexi-cap funds or diversified equity funds are a better option now, as these funds can navigate between market caps. Neil Parag Parikh, chairman and CEO, PPFAS Mutual Fund, in an interview to Saikat Neogi says short-term corporate bonds and medium-term state development loans look attractive from a risk-adjusted basis. Excerpts:
Should investors keep a neutral allocation to equity as an asset class with a large-cap bias?
Equity investment is a long-term strategy, and individuals should maintain a minimum time horizon of five to seven years. If the duration is shorter than this, funds should not be allocated to equities. Small and mid-cap stocks have recently surged, while large-caps offer more valuation comfort. Therefore, if investors have heavily invested in these sectors, they may consider reallocating to large-cap and flexi-cap funds. For those with new capital to invest, opting for flexi-cap funds or diversified equity funds is advisable, as these can navigate between market caps and fund managers invest where they identify value.
With interest rates falling, should investors look for shorter maturity bonds for better risk-adjusted returns?
It is very difficult to time the interest rate cycle, just like it is difficult to time the market in equities. It is always better to have a laddered portfolio looking at the spreads between various types of instruments and maturities. At present, short-term corporate bonds and medium-term state development loans are the two segments which look attractive from a risk-adjusted basis.
Which hybrid funds should conservative investors look at now?
A conservative investor should choose a hybrid fund that leans heavily on debt and arbitrage positions while maintaining a low equity allocation. These funds will be significantly less volatile than equity-heavy funds and will also safeguard the capital from market drawdowns though return expectations may be moderate.
A conservative hybrid fund works well here, but has lost its indexation benefits due to the new tax laws. Now, you will be taxed at your marginal rate. This fund will be suitable for those in the lower tax brackets. For those in the higher tax bracket, a dynamic asset allocation fund will be beneficial, as you will be taxed at 12.5%. Here, various schemes have vastly different equity-debt allocations, so conservative investors should select the one with a low equity allocation.
As gold has outperformed other asset classes, what is your advice on allocation to the metal?
Gold has performed well and has appreciated significantly. Investors should be cautious about chasing this or any asset class based solely on past performance. A 5-10% allocation to gold in the portfolio should suffice, in my opinion.
Are there any specific themes or sectors that you are favouring currently?
We follow a bottom-up investment strategy and evaluate each company on its merits. As such, we don’t have a strong bias towards themes and sectors. We currently find the private banking space and select PSUs in the current market environment interesting. Two spaces where we are reducing allocation/ avoiding right now are the capital market plays and consumption-oriented sectors.
Given the volatility in the markets, how important is asset allocation?
Asset allocation serves as the foundation for investment decisions. Investors should stick to their asset allocation based on their needs and risk appetite. If you are adhering to your asset allocation, no changes are necessary.
Recently, many individuals have pursued equity returns, deviating from their asset allocation by investing excessively in equities. This could be an opportune moment for them to reassess their overall financial plans and implement necessary adjustments.