Investors should build portfolios for an uncertain future, not chase winning assets: DSP MF’s Aparna Karnik

Investors should focus less on predicting which asset class will outperform and more on building portfolios that can withstand different market environments, says Aparna Karnik, Executive Director and Head of Quantitative Analysis, DSP Mutual Fund, in an exclusive interview with Fortune India. 

“I think investors often start with the question, ‘Which asset class will do best from here?’ I prefer to start with a different question: ‘What if the future is unknowable?’” she says. 

With markets influenced by growth, inflation, interest rates, valuations, geopolitics, currencies, and liquidity, making large bets on a single outcome can expose portfolios major risks. The objective of diversification, therefore, is not to predict the next economic cycle but to build resilience across different market conditions. 

Equities provide exposure to economic growth and wealth creation while fixed income offers stability and income. Gold and commodities can help during periods of sustained inflation while cash and short-duration instruments provide liquidity and the flexibility to capitalise on opportunities. “Every asset plays a role and works together as part of a team, with complementary strengths and weaknesses,” she says. 

According to Karnik, valuations remain an important anchor. When the margin of safety improves, exposure can be increased; when markets become exuberant and prospective returns deteriorate, the strategy is to book profits. DSP, for instance, had previously maintained higher commodity exposure but subsequently reduced it as the risk-reward equation changed. 

Asset allocation over market timing 

Karnik distinguishes between asset allocation and market timing, arguing that the former offers a more sustainable approach to managing portfolio risk. “Market timing is essentially a prediction: I know what is about to happen, so I am going to make a large portfolio bet on it. Good asset allocation starts from almost the opposite premise: I know that there are limits to what I can predict, so I will construct the portfolio such that I don't need to be right about everything,” she says. 

DSP follows a core-plus-tactical allocation framework. Under this approach, equities would generally account for 50–70% of the portfolio while commodities, primarily gold, would constitute 10–20%. Fixed income makes up the residual allocation, with some cash or cash equivalents maintained for liquidity and investment opportunities. 

These ranges are based on long-term historical data, considering returns, volatility, drawdowns, and correlations between asset classes. Tactical decisions determine whether the portfolio should be positioned closer to the upper or lower end of these ranges. 

Valuations guide these adjustments. Rather than predicting short-term market movements, the assessment focuses on whether prospective returns and the margin of safety justify taking on greater equity exposure. The fund evaluates valuations at both the stock and sector levels, as well as from a broader macroeconomic and earnings perspective. “The allocation is range-bound, but it isn't static,” Karnik says, adding that this approach helps investors avoid behavioural mistakes arising from excessive conviction in a single asset class. 

Diversification beyond equities 

Holding multiple equity funds, sectors or market-cap segments does not necessarily protect investors against a broader equity-market correction, Karnik says. While such investments reduce company-specific risks, correlations within an asset class can rise sharply during systemic market declines. “That is why I believe true diversification has to begin at the asset-class level,” she says. 

Diversification should involve combining assets with different economic drivers of returns. Equities provide exposure to growth and earnings, fixed income offers yield and the potential to benefit from falling interest rates, while gold and commodities can respond to inflation and uncertainty. International equities provide access to businesses and structural trends beyond domestic markets, while cash offers flexibility during periods of volatility. 

Risk management also extends to individual asset classes. In equities, DSP looks for structural growth opportunities while maintaining valuation guardrails. Position sizing takes into account market capitalisation, liquidity, and volatility. The fund also follows an active sell discipline when valuations become excessive or expectations embedded in a stock become unrealistic. 

“We are optimistic in identifying growth, realistic in setting boundaries, and pessimistic in managing risk. Those three things aren't contradictory. Good portfolio construction requires all three,” Karnik says. 

What investors should look for in multi-asset funds? 

Investors evaluating multi-asset funds should look beyond headline returns and examine the investment process, allocation framework and quality of returns, Karnik says. The first consideration is whether a fund is genuinely diversified or predominantly driven by one asset class despite having several exposures on its factsheet. Meaningful diversification requires meaningful allocations across asset classes. 

Investors should also examine how allocation ranges are determined, what triggers tactical changes and whether decisions are based on a repeatable framework or a succession of macroeconomic calls. 

Performance assessment should go beyond compound annual growth rates (CAGR) to include standard deviation, maximum drawdowns, risk-adjusted returns and performance across different market cycles. She says a multi-asset fund may underperform the best-performing asset class during a strong bull market. That alone does not indicate a weakness in the strategy. 

Karnik also cautions against assuming that multi-asset funds are automatically low-risk or capital-protection products. Portfolios with meaningful equity and commodity exposure will experience periods of volatility and drawdowns. 

Ultimately, the objective is to make these drawdowns more manageable by combining assets that respond differently to changing economic conditions. A fund's merit lies not in its ability to own today's winning asset but in whether its investment process allows investors to stay invested and compound wealth through an uncertain future, she adds.