In a candid dialog, Kalpen Parekh, MD & CEO of DSP Mutual Fund, lays out what he calls the “golden thumb rule” of investing: portfolios have to be constructed not round traits, however round construction.
In accordance with him, a 2026-ready portfolio can’t depend on a single theme or asset class. As an alternative, it should steadiness progress by equities, defence by belongings like gold and bonds, and, most significantly, self-discipline by considerate allocation and periodic rebalancing.
In an unsure macro setting, Parekh argues that survival and regular compounding matter greater than daring predictions — and that actual diversification is about low correlation, truthful valuations, and long-term behaviour, not merely proudly owning extra belongings. Edited Excerpts –
Kshitij Anand: Properly, everybody talks about diversification, however are most traders truly diversified or simply holding a number of shares in the identical theme?
Kalpen Parekh: I have no idea if everybody talks about diversification, to be sincere — possibly since you needed the subject to be on diversification. Really talking, should you have a look at any commentary at any time limit out there — and it’s over 30 years now — what everybody talks about is what’s topical immediately. And most investments are then polarised round what’s topical immediately.
So, in the previous couple of weeks, if tech shares have corrected due to new developments in AI globally, traders now need to put money into AI shares. And if, for the final 12 months, silver and gold costs have run up very sharply, everyone seems to be speaking about silver and gold. Headlines are additionally about silver and gold. In actual fact, most conversations are late, and traders then polarise their capital into late themes more often than not. After which there’s a large value to pay for being late.
See, in investing, to start with, we anyway begin late, so we lose compounding. And after that, we put money into an asset class late and then we lose capital. So first you lose compounding time and you then lose capital, and that could be a greater problem.
So, I feel diversification is an important dimension of investing, however I don’t assume folks speak about it as a lot as you and I might imagine they do.
Kshitij Anand: So, most likely individuals are not speaking about it, however they assume that they’ve achieved it. So, it’s about how they understand issues as a result of each relationship supervisor or asset supervisor talks about it. And I’m positive retail traders have it in thoughts — “Hey, if I embody a few shares from this theme and a few shares from that theme, in addition to add extra gold and silver to the portfolio, we’re actually diversified.” However that’s not all the time the case.
So, my subsequent query is basically round this theme. Has diversification modified which means within the final 5 to 10 years? You defined it superbly in your first reply as to how we understand it. So, given globalisation as nicely and rising correlation, what’s your tackle that?
Kalpen Parekh: So, allow us to bear in mind what diversification means. It’s about constructing a staff. I’ll give an analogy from cricket. We’re discussing the Cricket World Cup. In a T20 World Cup, sometimes the best way groups are fashioned is that you’ve nice pinch-hitters to begin the sport as a result of you’ve gotten solely 20 overs, so that you need to begin quick. You could have a great mixture of batsmen in addition to quick bowlers, then some spinners, and additionally all-rounders as a result of even in a 20-over match, it is advisable deploy totally different abilities relying on the sector situations and how the opposite staff is responding.
You can’t mannequin this earlier than the match begins since you have no idea how the opposing staff will play. Typically they play nicely and it’s a must to change your technique. Typically they could not play nicely, and you modify your technique. The identical applies to investing.
Even should you take the best way India’s IPL began, a really modern template was so as to add worldwide gamers, which introduced a really totally different dimension to the sport in comparison with how Indian gamers performed. Over time, it rubbed off on Indian gamers, and abilities developed by osmosis.
Now, coming to investing, diversification additionally means you’ll personal what is just not doing nicely and could not do nicely within the close to future. Whenever you diversify, you personal a number of asset lessons, and a number of asset lessons don’t all the time have the identical return path.
Actual diversification means constructing a portfolio of low-correlated asset lessons, which signifies that within the quick time period, they need to be enemies of one another. They may transfer in reverse instructions. They might not transfer collectively. They might even appear to be combating one another. However the second situation is extra necessary: in the long run, they need to give broadly comparable returns over a 10-, 20-, or 30-year interval. The drivers of returns ought to be comparable as a result of you don’t want to personal one thing that completely provides poor returns only for the sake of diversifying.
So, protecting these three issues in thoughts is essential. The underlying asset lessons need to be inherently inflation-beating on one hand or volatility-crushing on the opposite. They need to suppress volatility — that’s the first situation.
The second situation is that they need to have low correlation with one another in order that the entire portfolio doesn’t rise collectively or fall collectively. Most frequently, investor portfolios sink quick and drown the investor, and he will get out of the compounding sport. Good diversification ensures that portfolios don’t sink and that we keep afloat even throughout sharp crashes.
The third situation is that whenever you mix this portfolio in the precise proportion, allocation issues. The proportion has to mirror when you find yourself overweighting an asset class. In the present day, traders shopping for gold and silver could also be assembly the primary two situations, however they’re violating the third situation by overweighting gold and silver after they’ve turn into very costly, at the price of shares which might be progressively turning into pretty valued.
So, the third situation is equally necessary. I feel it’s a mixture of those three dimensions that we want to bear in mind.
Kshitij Anand: And in reality, that brings me to my subsequent query on the multi-asset technique. Do you assume that’s extra related in unsure macro environments such because the one we’re in proper now?
Kalpen Parekh: I’ll give a solution that has been given 100 instances. The macro setting is rarely clear. The world is all the time unsure. Whether or not we speak in 2026, 2027, 2036, 2015, and even 1998 once I began my profession — nothing is for certain at any time limit. That’s the very first thing one ought to know.
As a result of nothing is for certain, we can’t put all our cash behind one space of anticipated certainty. What if that certainty doesn’t play out and we go improper? Investing is about surviving the sport. If we take sure calls and go improper, and we don’t survive to see the subsequent day, we’ll by no means compound our cash.
So, we should all the time make investments protecting in thoughts that even when my opinion or view goes improper, I can’t exit completely or lose capital completely. I’m alive for the subsequent day. I can come again to the market and nonetheless play. I’m nonetheless within the sport to get one other likelihood. And that’s doable solely once we diversify.
The want for multi-asset investing is just not about immediately’s market. It was necessary 10 years in the past, it was necessary 100 years in the past, and it will likely be necessary a few years later as nicely. However the way to implement multi-asset investing is one thing most individuals don’t discover deeply.
Multi-asset investing can’t imply 90% in a single asset class and 10% unfold throughout three others. The proportion of diversification is essential. If you end up overweighting or underweighting an asset class additionally issues.
A few years again, having 20% in gold and silver in multi-asset funds could have been an amazing technique. However immediately, 25% in gold and silver could possibly be a really dangerous technique. Timing asset allocation to some extent turns into necessary.
A real multi-asset strategy would make investments throughout Indian equities, international equities, treasured metals, and bonds — which is a powerful mixture. Over a 20–30-year interval, it tends to ship returns nearer to the best-performing asset class, however with decrease volatility than that asset class.
For instance, once we launched our multi-asset fund two years in the past, if we had modelled the earlier 20 years, the mixed portfolio would have delivered returns nearer to equities — which have been then the best-performing asset class — however with solely about 60% of fairness volatility. So, you aren’t compromising a lot on returns, however you’re considerably decreasing fluctuations.
It is a extremely underrated dimension. When volatility is decrease, time horizons enhance, and that strengthens compounding.
In the present day, over the past 20 years, the best-performing asset class is not fairness as a result of gold and silver have run up sharply whereas equities have remained sideways. The best-performing asset class has turn into gold and silver. But multi-asset funds’ 20-year returns are nearer to gold and silver. I’m utilizing the phrase “nearer,” not equal or increased. If gold and silver delivered round 14% over 20–25 years, a multi-asset portfolio could have delivered 12.5% or 13% — very shut — however at almost half the volatility.
When gold and silver fell 15% to 35% within the final month, these portfolios barely fell — possibly 2–3%. That’s the great thing about multi-asset investing. One thing won’t do nicely in any respect deadlines. You’ll all the time have losers within the portfolio, however they could possibly be your future winners — which, left to your self, you might not personal on the proper time. One thing will all the time do nicely within the portfolio, and that’s the great thing about multi-asset investing.
Nonetheless, the time horizon for multi-asset investing nonetheless needs to be no less than 5 years, not one yr.
Kshitij Anand: How typically ought to asset allocation be reviewed? Ought to it’s annual or tactical? Can retail traders efficiently time asset lessons?
Kalpen Parekh: I feel the classification of retail versus non-retail is unfair. The actual distinction is between those that perceive markets and those that don’t. It’s improper to imagine retail traders don’t perceive. Many retail traders have the mind and time to study and apply these ideas. On the identical time, many rich, refined traders could not totally perceive them.
When you’ve got the aptitude to know markets and cycles, you’ll be able to consider rebalancing both annually or when an asset class strikes to extremes — when its weight in your portfolio goes off observe, both too low or too excessive.
That could be a good time to think about rebalancing and revisiting the setup. Has one thing essentially modified to justify the sharp transfer?
For instance, long-term returns of treasured metals over 30–40 years are sometimes between 8% and 11%. If, within the final yr, they’ve delivered 150%, or in two years 300%, that’s far-off from long-term averages. That’s unnatural. They might have recovered from below-average to above-average returns, and that explains the sharp positive factors. However the portfolio weight would even have gone off observe.
For instance, I had round 10% in treasured metals 18 months in the past. That 10% turned almost 20% as a result of gold and silver rose sharply whereas different belongings remained sideways. Now I have to ask myself — in immediately’s setup, ought to I’ve 20% in gold and silver?
Headlines could push me to extend publicity. They might say inflation will rise, central banks are shopping for, the world is fragile. However central banks have been shopping for 4 years in the past too. The world has all the time been fragile. Cash printing began in 2008. What has essentially modified?
Until there may be genuinely new info to justify a better allocation, and valuations are nonetheless affordable, it could be wiser to progressively carry 20% again to 10% — or first scale back it to fifteen%. Chasing a fast-moving asset class is harmful. If a fast-moving practice doesn’t cease on the platform and you attempt to board it whereas working, there’ll virtually definitely be accidents. The identical occurs with asset lessons which might be working too quick.
Rebalancing ought to occur when allocations turn into distorted. Reviewing yearly is cheap as a result of sometimes issues don’t change drastically inside a yr.
Kshitij Anand: If somebody needs publicity to actual property by options reminiscent of REITs or InvITs, or commodities — how are they structured, and ought to one take into account them?
Kalpen Parekh: Considered one of my fund managers talked about lately that he progressively began trimming publicity to REITs, most likely as a result of they’ve run up sharply over the past 18 months. It is a good alternative to remind traders to all the time have a framework earlier than investing.
Statements reminiscent of “REITs are a hedge towards inflation” or “that is the period of onerous belongings, so purchase REITs” could sound enticing, however they have to be backed by info and knowledge.
REITs should not straight-line bonds delivering increased fairness returns. They are often as unstable as equities. In case you have a look at the worldwide historical past of REITs — though in India the historical past is brief, solely two to a few years — and the variety of REITs is proscribed, actual property as a sector has traditionally had points reminiscent of free money circulation issues and governance challenges. It’s enhancing, and extra REITs will come, however we should proceed cautiously.
When REITs have already run up 30%, 40%, or 50%, one shouldn’t get carried away. Even equities don’t compound at 30–40% constantly. A one- or two-year return doesn’t justify over-allocation primarily based on a basic assertion like “they’re a hedge towards inflation.”
REITs can have normal deviations of round 17, which is similar to equities. Which means they fluctuate each upward and downward like equities. Traders must be aware of that and keep away from investing blindly.
Kshitij Anand: We additionally talked about rising geopolitical dangers. Nonetheless, US and European markets have delivered sturdy returns in comparison with India. At this stage, ought to portfolios be globally diversified?
Kalpen Parekh: I feel the framework of diversification shouldn’t revolve round India, China, the US, or Russia. Nations themselves don’t generate profits — companies do. In case you select a rustic, that nation has tons of of shares. So if I say the US seems to be good, how do you resolve which a part of the US seems to be good? It might sound clever, however it has little actionable worth.
As an alternative, I’d provide a extra sensible framework. Diversification shouldn’t be country-based. The precept ought to be whether or not you’re shopping for asset lessons at a good value or beneath truthful value. In the present day, we must always assume by way of equities — whether or not Indian or international — assuming geographical boundaries don’t exist.
There could also be ten excellent firms in India accessible at truthful or beneath truthful worth. There could also be 5 in Asia — say China, Korea, or Japan — at enticing valuations. There could possibly be sturdy companies in Italy or France, one in Canada, two within the Netherlands, or six within the US. So international diversification is just not about selecting a rustic, as a result of each nation has each bull and bear markets on the identical time.
Even in India this yr, markets could also be up 8–9%, however tech shares could possibly be down 20%, steel shares up 30%, pharma and client shares down, whereas financial institution shares are up. Inside banking itself, some shares could also be down 20% and others up 15%. So broad statements about markets are hardly ever significant.
The key’s understanding what sort of firms create wealth over the medium to long run. Sometimes, companies the place free money flows are rising, and which can be found at truthful or enticing costs, are inclined to carry out nicely. That ought to information allocation selections.
For traders who don’t have the time to check international companies, it’s higher to speculate by mutual funds that diversify globally. For instance, we launched a retail fund that enables traders to make use of the LRS tips of the Reserve Financial institution of India to speculate overseas by GIFT Metropolis. We began with a $5,000 ticket measurement to make it accessible to retail traders.
In case you have a look at our present portfolio, 9 out of twenty-two shares have fallen between 30% and 70% over the past three to 5 years. These shares are at the moment in a low cycle. Whereas many say markets are costly and ask when corrections will occur, there are already components of the world the place corrections have performed out and high-quality companies can be found at affordable costs. That ought to be the framework for international diversification — not merely a country-based strategy.
Kshitij Anand: That brings me to my second-last query, which I’m positive will curiosity many viewers. In case you needed to design a 2026-ready multi-asset portfolio, what would it not seem like?
Kalpen Parekh: Everytime you point out a one-year horizon — and we’re already partway by the yr — it turns into difficult.
Kshitij Anand: No, I imply constructing it in 2026 with a five-year horizon.
Kalpen Parekh: I normally say, present me your portfolio moderately than your market view. Portfolio development is dependent upon every investor’s behaviour, understanding, and threat profile. So please take my reply with that caveat. However I can let you know how I’d take into consideration allocating ₹100 immediately.
Kshitij Anand: Completely. Percentages are ok.
Kalpen Parekh: My strategy is all the time long-term targeted. 5 years is extra medium time period, however even then, progress have to be a key a part of the portfolio — which implies equities of companies with sturdy money flows.
I’d additionally desire a defensive part. Sometimes, gold and treasured metals act as defence when equities don’t carry out nicely. Nonetheless, immediately we’re in a particular scenario the place the defensive asset — treasured metals — has run up sharply and might even see heightened volatility. There have been lengthy durations the place gold and silver delivered zero returns and even fell 30–40% over 5 to 10 years.
So allocation selections are barely extra complicated proper now. However broadly, I’d cut up equities roughly equally between Indian and international shares — say about 33% every. I’d hold round 25% in bonds, which in India earn about 7–8%, and which could be deployed in periods of upper volatility in equities or treasured metals. Round 10% I’d allocate to treasured metals.
That’s how I’d construction my portfolio immediately. However this allocation works for me — yours could possibly be totally different. For 100 viewers, there could possibly be 100 distinctive portfolios.
Kshitij Anand: In actual fact, whenever you talked about that the type of inflows we noticed in gold ETFs final month have been increased than these in fairness funds, it clearly displays investor behaviour. So sure, to a big extent, you’ve gotten defined how behaviour works from an investor’s viewpoint. I’m positive the final query is equally attention-grabbing — what’s the largest mistake traders make whereas diversifying?
Kalpen Parekh: As I mentioned earlier, this ties again to your first query. I don’t assume traders genuinely take into consideration diversification.
In case you have a look at mutual fund flows, yearly there may be one central class that draws many of the inflows. This yr, it began with treasured metals getting the utmost flows. Final yr, it was the small- and mid-cap class. Earlier than that, it was thematic funds. Many sizzling funds have been launched as a result of these themes have been performing nicely — manufacturing, infrastructure, industrials, engineering, defence — and they obtained many of the inflows.
So no matter is doing very nicely tends to polarise traders’ capital. Personally, I don’t see real diversification. There’s typically no clear framework to resolve the way to make investments. The solely framework that drives most of us — and I used to be responsible of this myself within the first 10 years of my profession — is to verify which asset or fund has achieved nicely up to now yr and then put money into it. We assume that what carried out nicely final yr will proceed to carry out nicely subsequent yr. However many traders don’t perceive ideas reminiscent of cyclicality and imply reversion.
Traders have to study these ideas when constructing portfolios, or they need to search a great advisor who can information them.
One other widespread mistake is proudly owning too many mutual fund schemes. For instance, an investor could maintain 20 schemes, however every scheme in the end invests in an identical set of 40 shares. So by 20 schemes, you’re successfully proudly owning the identical 40 shares repeatedly. The consequence won’t be very totally different. In distinction, proudly owning three or 4 well-diversified fairness funds run with barely totally different funding kinds could result in a greater consequence than holding 20 schemes.
Equally, some traders could maintain 50, 60, and even 70 shares of their portfolios. That sounds diversified, but when the standard of these companies is poor, the outcomes won’t enhance. In case you ask traders, “What’s the return on capital of the businesses in your portfolio? Can these companies generate sustainable returns? Do they know the way to run their operations effectively?” most individuals wouldn’t know the solutions. Many could not even know what ROE or ROC means.
In the present day, there are considerably extra traders instantly investing in shares than by mutual funds. The assumption is that one should buy shares and generate profits. Some traders definitely can generate higher returns than mutual funds as a result of they’ve flexibility in portfolio development and time horizon. However blindly constructing portfolios with out understanding the foundations of the sport — with out analysing accounting high quality or whether or not monetary numbers are dependable — could be dangerous.
In actual fact, we performed an train two or three years in the past. We discovered that shares with the best variety of retail shareholders have been typically firms that had not generated returns on capital above their price of capital over the previous 5 to 10 years.
These are necessary studying factors. We all the time inform traders that it isn’t crucial to speculate all of your cash in mutual funds. In case you can study and construct a disciplined framework, you’ll be able to definitely outperform us. By all means, do this. However don’t do injustice to your cash by investing with out understanding the essential guidelines of the sport.
(Disclaimer: Suggestions, strategies, views, and opinions given by consultants are their very own. These don’t signify the views of the Financial Instances)
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