How India’s youngest pension fund gamed a falling market to outdo older rivals

To match the score of DSP’s fund, the new kid on the block, the sum of the funds that gave positive returns would need to be more than doubled. Among the 11 funds in this category, six recorded negative returns in the last year, according to the pension fund regulator’s NPS Trust website.

A closer look at DSP’s fund reveals an interesting pattern. At the end of 2024, 8.75% of its portfolio was in cash compared to Kotak Mahindra Pension Fund’s 3.86%, the fund with the second-highest cash allocation. While the average tier-1 NPS equity fund held 70 stocks, this fund had 27 positions.

In an interview with Mint, Ramneek Kundra, chief investment officer of DSP pension fund, said people should not come to his fund looking at the past performance as the 12-month timeframe is too short to judge any equity fund.

“I wish I could talk about a longer track record, but this is all that I’ve got for now,” said Kundra, who was earlier the fund manager of Taurus Tax Shield Fund. He managed the ELSS fund from May 2022 to August 2023, according to Value Research. The fund was ranked 22 when he joined and was in the sixth spot when he left in August 2023. He started DSP’s NPS fund on 26 December 2023. Here is an edited excerpt of the interview:

You outperformed rivals by a huge margin. Did the cash pile help as the markets were tumbling?

Cash calls are not the main reason for the outperformance. In fact, it has dragged our returns. If you look at 2024 (January to December), the benchmark, BSE 200, rose 14.72%. When you are holding cash and the markets are going up, that’s not a good thing. But even in that period, our fund gave 24.53%, the highest return among all NPS equity funds.

The individual stock picks worked in our favour. I acknowledge that markets have fallen a lot lately, and the extent of outperformance has increased significantly. In 2024 (January to December), our alpha compared to the benchmark was 9.81%. After the markets dropped, the alpha to benchmark for the past 12 months is now almost 12%.

Having cash helped us because whenever the markets fell, we could buy stocks at attractive valuations, and that contributed to the outperformance. We were holding around 7-8% cash on average from the start, as the rule says we can’t have more than 10% in cash.

I’m always mindful that investors who pick us purely for outperformance may be the first to leave during a rough patch. Markets are not always kind, and we will surely underperform at some point. That is the natural course of any disciplined investment approach.

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Can you tell us about some of your calls that went right?

The benchmark fell around 7% last month. As you can see in our factsheet, we bought stocks last month. Our cash level went down from 8.6% in December, and we will end February with about 6% cash.

We did a similar thing with a couple of leading private banks. When one of them reported weak December results, its share price fell over 15% in January 2024. Investors were concerned about its growth. But I thought, after the correction, a growth of only 11-12% was priced in and the company had the potential to do better. We made that bank our largest position at that time.

After three months, the same story repeats with another private bank. It also fell over 15% when RBI put restrictions on it from onboarding new digital and credit card clients. At that time, we ended up buying a lot of the bank’s shares. We were fortunate enough to get these two banks at really attractive valuations.

The tradeoff for having cash is that the market can go up, and I can miss out on the gains. The flip side is that when the markets fall, it allows us to buy businesses at really attractive valuations.

But if given an option, and something similar to the covid crash happens, then I would like to deploy all my cash. But until I find such attractive potential investments, I have to remain prudent and hold some cash. I also think our cash levels are not that high. It only looks huge relative to the cash levels several other funds hold.

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The average NPS funds hold 70 stocks. You have 27 positions. Why is it so concentrated?

You meet many people over your lifetime, but very few people you meet will get along with you well. If you meet 100 people, you might find 4-5 who get along with you. And out of those, you might find only one or two that vibe with you.

We think about stocks similarly. It’s generally hard to find opportunities you like. Last year, I was perplexed, like everyone else, looking at the valuations. When that happens, cash is the default position. The fear that I had last year is playing out today.

Apart from cash, we anyway try to be more conservative. Excluding financial companies, only 3-4% of our portfolio companies have debt. Our downside capture ratio is 59% and the upside capture ratio is 93%.

This means that on average when the benchmark falls 10%, we go down 5.9%, whereas when the benchmark rises 10%, we will go up 9.3%. We protect the downside way more than we catch the upside. We prefer keeping it that way.

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The performance of the fund has been good, but the track record is relatively nascent. Anything you would like to tell your investors?

You’re right.I wish I could talk about a longer track record, but this is all that I’ve got for now.I’ve been managing funds in a regulated structure—first at a mutual fund and now at a pension fund—for a little less than three years—a little over a year at DSP Pension Fund, and before that, 15 months at a mutual fund.

I’m always mindful that investors who pick us purely for outperformance may be the first to leave during a rough patch. Markets are not always kind, and we will surely underperform at some point. That is the natural course of any disciplined investment approach.

So, rather than focusing on a single year’s returns, I believe the right way to judge us is by how consistently we adhere to our investment framework—one built on conservatism, prudence, and patience. We focus on buying businesses at reasonable prices with a margin of safety, prioritizing downside protection, and staying patient when opportunities are scarce.

You wrote an annual letter reflecting on some of your holdings. All seven stocks that you mentioned are also held by PPFAS’s Flexi cap scheme. Any thoughts on this?

The principles we follow could be very similar. I’ve learned everything from Warren Buffett, and I’m sure PPFAS did the same. As disciples of Buffett, for better or worse, one can end up pretty similar because we think the same way.

When I returned to India from the US, I invested in Bajaj holdings in my personal portfolio. I found that only one mutual fund held that company—PPFAS. I thought they were doing a great job, so I invested in their scheme. I’ve been an investor with them ever since.

But copying someone’s portfolio is something I try to avoid. If they have a stock in their portfolio, I don’t know when they have entered and, more importantly, when they will exit. However, I do track their portfolio because I respect them and I am also an investor. Comparing me to them would be a humbling experience. My track record is nothing compared to theirs.

What are your thoughts on the NPS as an investment vehicle, considering the performance of broader market?

NPS is a disciplined, tax-efficient compounding tool, but its attractiveness as an investment depends on market returns and asset allocation.

The only downside is compulsory annuitization of 40% at retirement, where annuity returns would not match long-term equity returns, but the structure forces long-term investing, giving investors a behavioural advantage as they avoid reactionary selling during downturns.

Three-year rolling equity returns tend to revert to 12-15% CAGR, even after volatile periods.

You are a relatively unknown fund manager, and were managing your own money before. Why did you choose a career in investing?

I did a Masters in Integrated Marketing from NYU, but it was not related to finance. I interned at a startup that was selected for Disney’s accelerator program. However, the company closed after a few months. I tried my luck in another startup, but that never took off. I came back to India in 2016 and started managing my family’s money using value-investing principles. I enrolled for an online course on value investing from Columbia Business school.

Taurus MF promoter offered me a job. It was a very small fund with an AUM of around ₹65 crores. At the peak, we generated close to 8.9% alpha compared to the benchmark. It became the top quartile performer because of being a laggard on a one-year basis. Somewhere around December 2022, Kalpen Parekh, CEO of DSP AMC offered me this job.

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