Over the past 12 months, Parekh has been allocating to hybrid funds (which invest in a combination of low-correlated assets) such as equity savings funds and multi-asset funds, as market valuations have been expensive. His portfolio’s allocation to hybrid funds has risen from 26% last year to 34%, Parekh shared in an interaction with Mint for the Guru Portfolio series. In this series, leaders in the financial services industry share how they manage their own money.
Current asset allocation
As mentioned earlier, his exposure to hybrid funds stands at 34%. His exposure to Indian equities stands at 34%; exposure to international equities is at 13%; 12% is in debt funds and 7% is in gold. Gold allocation is split 45% in sovereign gold bonds and 55% in gold mining funds. The latter invest in equity shares of gold mining companies. Gold mining stocks typically rise 1.3 to 1.5-times the gold prices. However, Parekh warns that gold mining funds are not for everyone “as it also tends to be more volatile when gold prices fall”.
Parekh has remained cautious on equity markets, but has slowly added to equities amid the recent market correction. He has been allocating money to equity funds, which have a mixed exposure to India and international stock markets.
“Have shifted some money from arbitrage fund to our value fund and aggressive hybrid fund (just around 2%). But my dynamic asset allocation fund exposure will automatically increase equity exposure when valuations correct,” he says.
He says he prefers funds that are designed to dynamically move across asset classes depending upon market conditions, reducing his involvement. “I prefer a portfolio that is as auto-pilot as possible. So, I can simply let the investments grow and compound without the need to tinker a lot. My intent with portfolio allocation has always been to reduce the number of decisions and even transactions and achieve certain level of inaction in the portfolio, to minimize the influence of my behavioural biases on investment decisions,” he explains.
His mid- and small-cap exposure stands at 20%, while 80% is in large-caps. This market cap split is based on equity exposure through flexicap and hybrid funds.
“For the past three years, I have broadly maintained a 65:35 allocation—65% towards Indian and global equities, and 35% towards bonds and gold. That’s still the case today,” he says.
About 88% of his investments are through DSP MF’s schemes.
Portfolio performance
Parekh says he prefers not to track his portfolio to check short-term performance. “Markets will go up and down in the interim and that is fine. My portfolio might underperform at certain points, which is also fine. As long as my funds are designed to fall less during market volatility — which is what I look for when choosing funds — I am okay with my portfolio lagging behind a bit during market euphoria.”
Up until September last year, Parekh says his 65:35 (equity: non-equity) portfolio was earning 1.5-2% less than Nifty 500 Index on a 5-year basis. At this point, Nifty 500 Index had 21% annualized returns over the five-year period.
He says focusing on funds designed to handle his low tolerance for volatility has cushioned his portfolio over the past year amid market correction. “Markets are down 12% since September peak. My 65:35 portfolio is down 3% due to cushion of bonds, gold and equity hedges in this phase,” he points out.
Over the past five-year period, Parekh’s 65:35 portfolio has delivered annualized returns of 22%, while Nifty 500 has delivered 24% annualized returns and an aggressive hybrid index would have delivered 18% annualized returns.
“These are higher than usual returns as prices had crashed five-year back due to Covid-19,” he cautions.
His allocation to long duration debt and gold has given a boost to his portfolio. “Bonds have delivered over 8–10% returns over the past year because interest rates have drifted downwards. Gold has done what it typically does during periods of uncertainty. Gold has delivered 40% in the last year—that’s nearly three-and-a-half times its long-term average returns of 11%,” Parekh says.
It’s not just about returns
“I am building my portfolio for the next 20-30 years. So, how it has performed in past one-year or five-year is not very meaningful for me. I believe in what Morgan Housel says about earning reasonable rates of return for unreasonable period of time. And when do you get unreasonable period of time; when you don’t have to worry about anything suddenly going wrong,” Parekh says.
If anything, the last five years have only reinforced his investment principles, he says. “The five-year period started with Covid-19 pandemic. The markets ran up sharply from Covid-19 lows and now we are again seeing correction amid these tariffs-related uncertainty. Focusing on news flow or knowledge of topical events has limited value in portfolio construction or outcomes. Markets will always go through periods of intermittent highs and lows. Investors should stick to their target asset allocation — preferably a diversified asset allocation — without getting too swayed by market fluctuations,” Parekh says.
He says he looks to minimize risks, instead of chasing returns. He looks at risks from the prism of valuations. “When valuations are high, I increase exposure to protective assets like hybrid funds, debt, gold, etc. and when valuations are cheap, I increase allocation to growth assets like equity funds,” he says. His maximum ceiling for equity allocation is 80%. “I will always keep at least 20% non-equity allocation in my portfolio to diversify with assets that have low correlation with equities,” he adds.
Parekh says he is yet to utilize his equity investment ceiling limit as he is not yet comfortable with valuations. He is sticking to his 65:35 equity:non-equity allocation rule for now.
“I try to think of alternate histories. What if my view went wrong, would the portfolio still stay resilient and still deliver reasonable returns. This framework guides me to build slightly conservative portfolio,” he explains.
He cut his mid-cap exposure last year around elections due to high valuations and reallocated these funds to hybrid strategies.
Also read: Investors should moderate their return expectations, says Mirae Asset CIO
Money talks with his son
Parekh regularly talks to his son about investing and money management. He also posts reels of his son, where he asks his son to explain a new money concept he has learnt.
He says he has tried to inculcate a basic money principles in his son, which he got from his mother. And that is – buy quality, but try to buy it cheap. “Whether it is buying anything — shoes, clothes, a bat — I always tell my son to look for quality stuff and if possible, wait for discounts. This same principle he can also apply to investing,” Parekh says.
“Now, my son is 18 and pursuing engineering. So, he doesn’t get much time. But over the years, he has seen and heard me talk about investing and managing money,” he says.
Takeaways
Parekh’s investment approach shows the benefits of building a diversified portfolio across asset classes. There is no guarantee that the asset class that outperformed last year will continue to do so this year as well. On the contrary, it is more likely for winners and laggards to swap places. A portfolio that straddles asset classes will find winners in some pocket or the other.
Parekh prefers funds, which dynamically make switches from expensive to undervalued asset classes, reducing his need to intervene and thereby minimizing the influence of his own behavioural biases on investment decisions.
Key learnings
When building your own portfolio, consider different asset classes
Asset allocation funds are a smart choice, avoids personal biases
Your asset allocation depends on your risk-tolerance capacity
Stick to your asset allocation; see cheap valuations as opportunity