Inflows is the new fundamental: Kalpen Parekh

How low interest rates are pushing up stocks prices, why equity mutual funds must beat their benchmarks and why SIPs are the best option for retail investors, explains Kalpen Parekh, President, DSP Investment Managers.How surprised are you by the recovery in the stock markets?At the beginning of April, we were looking at two possible scenarios. The first scenario was a manageable recession, pent up demand coming back and a quick V-shaped recovery. If that were to happen, with the support of liquidity, equity prices would reach new highs, bond spreads would fall, followed by interest rate cuts. The second scenario was a deeper recession, larger fiscal stimulus and eventually rising inflation. Out of these two possibilities, the first scenario has played out in terms of stock prices rising fast.Now we need to watch if the stock market will give up its gains because economic recovery is still far ahead and not yet visible. Lockdowns may still continue, especially in the largest metros that are major hubs of economic activity. Going forward we may get to see a higher degree of volatility.While markets are moving up, the economy is not. Do you see a dichotomy here? If you go purely by fundamentals, markets deserve to be lower than they are right now. However, inflows is the new fundamental. Central banks across the world have helped in supporting stock prices, right from the Fed to the ECB to the Japanese central bank. When global interest rates are between 0 and 1%, it automatically reflects in higher stock valuations. Massive liquidity is being created, including in India where a surplus liquidity of Rs 6 lakh crore is lying in the bond market every day.One can argue that this central bank liquidity isn’t directly buying stocks. However, it does help in keeping interest rates low and supports stock prices. Everybody thinks there is a backstop from central banks, so markets won’t fall much. But predicting market behaviour is tricky business. Nobody could have predicted in January that markets will fall by 40% in March, just like we cannot predict in August how things will pan out in the coming months.What does this mean for investors in equity funds? Investors should remember the golden rule: at very high valuations, future returns are low while at very low valuations, future returns are high. Nobody could have foreseen Covid, but everyone knows that our market multiples, whether price to earnings, price to book value or dividend yield are on the higher side than they have been in the past 20 years. Even though economic growth and corporate profits have been weak, good stocks are quoting at price multiples higher than in the past.Stock valuations have been higher in the past five years because interest rates have been very low the world over. Markets may not crash, but easy returns are behind us. We will have to watch when the interest rate cycle starts turning, the Fed starts adjusting its balance sheet and starts hiking interest rates. In the past few days, inflation expectations in the US have moved up.How satisfied are you with the performance of your funds?While our funds have been among the top performers in their respective categories, we have realigned our performance measurement to alpha generation and not to peer group alone. We are aware of our responsibility to do better than benchmarks and deliver value to investors. If our funds don’t beat their benchmarks, investors would invest in the Nifty or maybe the Nifty Next 50 eventually. Fund performances do have cycles and we hope to maintain consistency over these cycles, by investing around each fund’s investment philosophy.Also read: 3 out of 10 investors quit mutual funds to move to stocks: Should you also ditch your MFs?Many investors are disillusioned by mutual fund returns and are investing in stocks directly. Do you think that is prudent? It’s ironic. The returns of equity funds fell because stock prices fell. So if investors were holding stocks, they would have lost money too. There is nothing wrong in investors buying stocks directly, if they follow a time-tested method and have the ability to pick the right stocks. At the same time, investors must realise that whether they invest in stocks or equity funds, they are investing in the same asset class and will face the same risks and returns.Eventually, it will be survival of the fittest. As mutual funds, we have to ensure we create wealth for investors over long periods of time and set the right expectations. Excess returns come with volatility – whether in direct stocks or equity mutual funds. Let investors compare the returns of both over time and accordingly invest their money.Long-term SIP returns are muted. Do you think the SIP mode can deliver better returns to investors?The returns of SIPs in equity funds can’t be any different than returns from equity as an asset class. SIP returns also have high and low phases. When markets fall, NAVs fall and the SIP returns look low. But when markets rise again, these returns look good.The beauty of SIPs is that instalments do what investors don’t. Investors who didn’t tinker with SIPs put money in March, April and June when markets were at lower levels. SIP is not a return maximiser. It is only a process of investing for those who earn monthly income. SIPs don’t make us aggressive investors, but they do make us aggressive savers.Also read: Trading in stocks is injurious to your wealth: Here's a boring but better option

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