Equities, debt or gold? Kalpen Parekh lays out the right asset allocation approach this Diwali

With Indian markets stuck in a two-year consolidation phase and gold emerging as a major portfolio performer, DSP Mutual Fund’s Kalpen Parekh says investors should focus on asset allocation rather than chase recent returns. He recommends slowly adding equities after the correction, maintaining debt for stability and liquidity, and treating gold as a diversifier, not a momentum trade.

Edited excerpts from a chat:

Diwali is the time of the year when we think of making new beginnings. But the market is stuck in a time warp for the last 2 years and SIP investors are nursing wounds. What's the best way to approach markets at this stage?

Markets have delivered strong returns in the years leading up to September 2024, and valuations had moved well ahead of earnings. The last two years have largely been a period of consolidation, allowing earnings to catch up with prices. Such phases are a normal part of investing.


For long-term SIP investors, this period can actually be useful. When markets remain flat or correct, investors accumulate more units at lower prices. I often say that bear markets are bull markets for unit accumulation. The benefits of this become visible over time, as markets recover and earnings grow.

Equity investing requires patience through different market cycles. Investors should focus less on returns over the last two years and more on whether their asset allocation, investment horizon and ability to tolerate volatility remain aligned. A portfolio that allows you to stay invested through difficult periods is far more valuable than one built around expectations of uninterrupted returns.

If a young investor has ₹10 lakh to invest this Diwali, how should the money be allocated across equity, fixed income, gold and other asset classes? Should the entire amount be invested at one go or staggered?

Asset allocation is very personal. It depends on your goals, how long you can stay invested and how much risk you are comfortable taking. So, I don't think I can suggest one allocation that would work for everyone.

For most investors who are not familiar with the basics of investing, I think the first step should be to find a good money coach, whether that is a mutual fund distributor (MFD) or a registered investment adviser (RIA). Someone who can help you understand your goals, risk appetite and build an investment plan that works for you.

Additionally, if you are new to investing, I think passive funds and multi-asset funds are good ways to start. If your investment horizon is 10 years or more, you can also consider mid- and small-cap funds, provided you are prepared for the volatility that comes with them. I would also keep some money in debt. It gives you stability and the flexibility to invest more when markets correct. Gold can be a small part of the portfolio for diversification.

Honestly, we don’t know where markets will be six months or a year from now. What makes sense is having a sensible mix of assets that you can stay invested in, even when markets go through difficult periods.

For investors sitting on cash after the recent correction, what is the right framework for deploying fresh money when it is impossible to identify the exact market bottom?

I think this is a better time to slowly start adding back equities, as we have seen sharp corrections, especially in large caps. But whether you invest today, tomorrow or at any other time, you should be clear that equity investing requires a time horizon of at least 5 to 7 years, and there will be ups and downs in your NAV along the way.

What should a balanced asset allocation portfolio look like across different market cycles, and how frequently should investors rebalance it?

I don't think there is one ideal asset allocation for every investor or every market cycle. A person investing for three years should have a very different portfolio from someone investing for 15 years. The ability to tolerate a temporary 20–30% fall in equities also matters.

Equities offer the potential for higher long-term returns but can be very volatile in the short term. Debt provides stability and liquidity, while gold can offer diversification. Investors who find it difficult to manage these allocations themselves can also consider hybrid or dynamic asset allocation funds.

Rebalancing should be driven by how far the portfolio has moved away from the intended allocation, rather than every market headline. Reviewing the portfolio once or twice a year is a reasonable discipline. If equities have risen sharply and become a much larger part of the portfolio, some profits can be moved to debt. Similarly, a correction may create room to increase equity exposure. The idea is to manage risk, not predict the next market movement.

Gold has delivered strong returns and attracted considerable investor interest but is now a party spoiler. How should investors evaluate their existing gold exposure?

I wouldn't call gold a party spoiler. Gold has done very well, and it is natural for investors to get excited when an asset class delivers strong returns. But we have to be careful about buying more of something simply because its price has gone up. We often see investors becoming more interested in an asset after it has delivered good returns, rather than when it was available at a reasonable price.

I look at gold as a diversifier, not as an asset where we should keep chasing returns. Unlike equities, gold does not have underlying earnings or cash flows. Its price is influenced by global uncertainty, interest rates, currencies and investor demand. So, we should not assume that the returns of the last few years will continue.

If you are underweight on gold in your portfolio, the recent 25% correction makes this one of the better times to add to your allocation. On the other hand, if gold has become a much larger part of your portfolio because of the recent rally, it may be sensible to rebalance some of it into other asset classes. I don't think investors need to exit gold or keep adding to it based on recent price movements. Every asset class has a role in a portfolio. The idea of asset allocation is to have different assets that behave differently across market cycles, rather than constantly moving money into what has done well recently.

You have been vocal about the impact of human emotions on investing as there is a behavioural science aspect involved in the business. How do you see the greed and fear cycle has evolved since the market peaked out in September 2024 and at which stage are we now?

Market cycles are as much about psychology as economics. September 2024 was marked by optimism and expensive valuations. Nearly two years later, exuberance has given way to caution. I would describe the current phase as one of scepticism rather than extreme fear.

Gold and silver offer an interesting lesson. Silver delivered almost no meaningful returns over much of 2015–19 but rewarded patient investors handsomely in the years that followed. By January 2026, it had risen nearly 200% in a year. Gold had gained almost 80%. An investor entering after such a spectacular rally was taking significantly higher entry risk. And eventually losing your capital

The practical lesson is to look at what has been ignored, not just what has performed. When an asset is out of favour, examine whether its fundamentals and long-term potential remain intact. When everyone is excited about it, examine what is already priced in. That is a more useful way to navigate the greed and fear cycle than trying to predict market tops and bottoms.

The general consensus on Dalal Street appears to be that most of the problems like crude oil, rupee, AI craze, etc. are not of India's doing. But at the same time India has no direct AI play, and valuations were not in favour either when FII selling began. What can we do to bring FIIs back in big numbers?

Foreign investors compare opportunities across markets. They look at growth, earnings, valuations, currencies and the returns available elsewhere. India may continue to be a good long-term growth story, but that does not mean foreign investors will buy Indian equities at any price.

In 2024, Indian valuations had become expensive relative to earnings. At the same time, other markets offered opportunities at more reasonable valuations. Global investors also have access to businesses and sectors that may not be represented in the same way in Indian indices.

Money will flow where it finds respect, growth, good entry prices, convenience and opportunity to stay for long (decades). India does offer most of these. We have room to reduce operational hassles for global investors, simplify onboarding rules and make tax rates competitive. Making the economy robust and resilient solves for the durability of the opportunity.

A lot of investor conversation on market outlook these days is focused more on FII selling than on valuations. Are valuations turning attractive enough at the index level to attract foreigners back?

Indian markets are certainly more reasonably valued today than they were in September 2024. Share prices have largely remained flat for the last two years, while earnings have continued to grow, though at different rates across sectors. So, some of the excess valuations we saw earlier have gradually corrected.

But I would not say everything is cheap. We are finding better value in larger companies, particularly in banks and insurance, while some parts of the mid- and small-cap market are still expensive. We have always believed that the price we pay for a business matters as much as the quality of the business itself.

Foreign investors are looking at the same opportunities. India is a good economy with long-term growth potential, but a good economy and a good investment are not always the same thing. If we buy at very high valuations, even good earnings growth may not translate into good returns. As valuations become more reasonable and earnings continue to grow, I believe India will become increasingly attractive to global investors. We are optimistic about that, though I don't know exactly when foreign flows will return.