Invest in ‘dal-chawal’ funds: Edelweiss CEO Radhika Gupta shares her guide on investing in mutual funds

Mutual Fund Investment: India’s economic expansion is closely linked to the performance of equity markets. When certain sectors start to grow, it leads to increased investor confidence, increased market activity and elevated asset prices. This optimistic outlook in equity markets stimulates additional investment in these growing sectors. India offers a diverse investment landscape, from successful financial institutions to pioneering startups. However, understanding and navigating this vast landscape can be difficult.

Diversification serves as a remedy to this challenge by spreading investments across different asset classes, industries and scales of companies. Through diversification, the impact of a single company or sector facing a decline is mitigated. Hence, by gaining exposure to a broad index that represents the diversified Indian economy, investors position themselves to reap the rewards of its growth.

Radhika Gupta, Managing Director and CEO of Edelweiss, shared her advice for those who invest in mutual funds. In a series of posts on X, she said that those who invest should ensure that “80 percent” of their portfolios comprise “dal-chawal funds”.

She mentioned that balanced gains and aggressive hybrid mutual funds can be compared to dal-chawal as they are considered all-weather funds. She advised investors against investing in narrow thematic funds that may do well in one cycle but not in the next. A diversified investment portfolio includes a variety of assets to reduce the risk associated with each individual investment. This strategy can help protect your finances from significant losses and potentially increase returns through the balancing effect of different asset classes.

“What is a dal chawal fund? Broad funds that are all-weather and cover a range of sectors. Balanced benefits and aggressive hybrid types. Flexible, multi, large and mid, broad index types 250-500. Forever funds. Active or passive doesn’t matter – it’s not a narrow theme-based fund that works in one cycle and not the next,” Gupta wrote on X.

Explaining the investment pattern, Gupta described a portfolio where a monthly SIP of Rs 27,000 was made with 31 funds. Out of the 31 funds, 15 were narrow sector funds.

She explained, “I recently saw the portfolio of an investor with a monthly SIP of Rs 27,000. In 31 funds. Of these, 15 are narrow sectors. The danger these days is to fill the portfolio with narrow ideas, which ideally are satellite allocations. Remember, 80% of the portfolio should be ‘dal-chawal’ funds!”

Radhika Gupta said that broad-based mutual funds, which are “all-weather” and “cover a range of sectors”, are “dal-chawal” funds. Broad-based index funds are investment vehicles that track a specific market index. These funds achieve their diversification by owning a basket of companies from different sectors and market capitalisations. By investing in a broad-based index fund, investors can effectively spread their risk across a wide range of companies without having to actively pick individual stocks. This passive investment approach reduces the risk associated with the performance of a single company and provides a simple and cost-effective way to gain exposure to the broader market.

Gupta’s top tips

1. Over the long term, most sectors’ returns are in line with the market. So a buy-and-hold approach to a sector fund will rarely beat the market.

2. In the medium term, sectors exhibit cycles. So there is alpha to be made if you can do the entry and exit correctly.

3. Traditional flexicap and multicap funds do not aggressively rotate sectors. My suspicion – because it is difficult to predict sector cycles and performance. Banks did not do well when interest rates rose recently (contrary to conventional wisdom). Tech did well during the covid recession (counterintuitively).

4. In terms of sector rotation, narrow sector funds achieved returns in line with the market and “rarely” beat it.

5. With respect to sector funds, Gupta noted that they are cyclical — for example, broad funds move aggressively between down and up cycles, but predicting down cycles is difficult and sometimes counterintuitive.