According to him, a 2026-ready portfolio cannot rely on a single theme or asset class. Instead, it must balance growth through equities, defence through assets like gold and bonds, and, most importantly, discipline through thoughtful allocation and periodic rebalancing.In an uncertain macro environment, Parekh argues that survival and steady compounding matter more than bold predictions — and that real diversification is about low correlation, fair valuations, and long-term behaviour, not simply owning more assets. Edited Excerpts –
Kshitij Anand: Well, everyone talks about diversification, but are most investors actually diversified or just holding multiple stocks in the same theme?
Kalpen Parekh: I do not know if everyone talks about diversification, to be honest — maybe because you wanted the topic to be on diversification. Truly speaking, if you look at any commentary at any point in time in the market — and it is over 30 years now — what everyone talks about is what is topical today. And most investments are then polarised around what is topical today.
So, in the last few weeks, if tech stocks have corrected because of new developments in AI globally, investors now want to invest in AI stocks. And if, for the last 12 months, silver and gold prices have run up very sharply, everyone is talking about silver and gold. Headlines are also about silver and gold. In fact, most conversations are late, and investors then polarise their capital into late themes most of the time. And then there is a huge price to pay for being late.
See, in investing, first of all, we anyway start late, so we lose compounding. And after that, we invest in an asset class late and then we lose capital. So first you lose compounding time and then you lose capital, and that is a bigger challenge.
So, I think diversification is a very important dimension of investing, but I do not think people talk about it as much as you and I may think they do.
Kshitij Anand: So, probably people are not talking about it, but they think that they have done it. So, it is about how they perceive things because every relationship manager or asset manager talks about it. And I am sure retail investors have it in mind — “Hey, if I include a couple of stocks from this theme and a couple of stocks from that theme, as well as add more gold and silver to the portfolio, we are truly diversified.” But that is not always the case.
So, my next question is largely around this theme. Has diversification changed meaning in the last five to ten years? You explained it beautifully in your first answer as to how we perceive it. So, given globalisation as well and rising correlation, what is your take on that?
Kalpen Parekh: So, let us remember what diversification means. It is about building a team. I will give an analogy from cricket. We are discussing the Cricket World Cup. In a T20 World Cup, typically the way teams are formed is that you have great pinch-hitters to start the game because you have only 20 overs, so you want to start fast. You have a good mix of batsmen as well as fast bowlers, then some spinners, and also all-rounders because even in a 20-over match, you need to deploy different skills depending on the field conditions and how the other team is responding.
You cannot model this before the match starts because you do not know how the opposing team will play. Sometimes they play well and you have to change your strategy. Sometimes they may not play well, and you change your strategy. The same applies to investing.
Even if you take the way India’s IPL started, a very innovative template was to add international players, which brought a very different dimension to the game compared to how Indian players played. Over time, it rubbed off on Indian players, and skills evolved through osmosis.
Now, coming to investing, diversification also means you will own what is not doing well and may not do well in the near future. When you diversify, you own multiple asset classes, and multiple asset classes do not always have the same return path.
Real diversification means building a portfolio of low-correlated asset classes, which means that in the short term, they should be enemies of each other. They could move in opposite directions. They may not move together. They may even seem to be fighting each other. But the second condition is more important: in the long term, they should give broadly similar returns over a 10-, 20-, or 30-year period. The drivers of returns should be similar because you do not want to own something that permanently gives poor returns just for the sake of diversifying.
So, keeping these three things in mind is very important. The underlying asset classes have to be inherently inflation-beating on one hand or volatility-crushing on the other. They should suppress volatility — that is the first condition.
The second condition is that they should have low correlation with each other so that the whole portfolio does not rise together or fall together. Most often, investor portfolios sink fast and drown the investor, and he gets out of the compounding game. Good diversification ensures that portfolios do not sink and that we stay afloat even during sharp crashes.
The third condition is that when you blend this portfolio in the right proportion, allocation matters. The proportion has to reflect when you are overweighting an asset class. Today, investors buying gold and silver may be meeting the first two conditions, but they are violating the third condition by overweighting gold and silver after they have become very expensive, at the cost of stocks that are gradually becoming fairly valued.
So, the third condition is equally important. I think it is a combination of these three dimensions that we need to keep in mind.
Kshitij Anand: And in fact, that brings me to my next question on the multi-asset strategy. Do you think that is more relevant in uncertain macro environments such as the one we are in right now?
Kalpen Parekh: I will give an answer that has been given a hundred times. The macro environment is never clear. The world is always uncertain. Whether we talk in 2026, 2027, 2036, 2015, or even 1998 when I started my career — nothing is certain at any point in time. That is the first thing one should know.
Because nothing is certain, we cannot put all our money behind one area of expected certainty. What if that certainty does not play out and we go wrong? Investing is about surviving the game. If we take certain calls and go wrong, and we do not survive to see the next day, we will never compound our money.
So, we must always invest keeping in mind that even if my opinion or view goes wrong, I will not exit permanently or lose capital permanently. I am alive for the next day. I can come back to the market and still play. I am still in the game to get another chance. And that is possible only when we diversify.
The need for multi-asset investing is not about today’s market. It was important 10 years ago, it was important 100 years ago, and it will be important many years later as well. But how to implement multi-asset investing is something most people do not explore deeply.
Multi-asset investing cannot mean 90% in one asset class and 10% spread across three others. The proportion of diversification is very important. When you are overweighting or underweighting an asset class also matters.
A few years back, having 20% in gold and silver in multi-asset funds may have been a great strategy. But today, 25% in gold and silver could be a very risky strategy. Timing asset allocation to some extent becomes important.
A genuine multi-asset approach would invest across Indian equities, global equities, precious metals, and bonds — which is a strong combination. Over a 20–30-year period, it tends to deliver returns closer to the best-performing asset class, but with lower volatility than that asset class.
For example, when we launched our multi-asset fund two years ago, if we had modelled the previous 20 years, the combined portfolio would have delivered returns closer to equities — which were then the best-performing asset class — but with only about 60% of equity volatility. So, you are not compromising much on returns, but you are significantly reducing fluctuations.
This is a highly underrated dimension. When volatility is lower, time horizons increase, and that strengthens compounding.
Today, over the last 20 years, the best-performing asset class is no longer equity because gold and silver have run up sharply while equities have remained sideways. The best-performing asset class has become gold and silver. Yet multi-asset funds’ 20-year returns are closer to gold and silver. I am using the word “closer,” not equal or higher. If gold and silver delivered around 14% over 20–25 years, a multi-asset portfolio may have delivered 12.5% or 13% — very close — but at nearly half the volatility.
When gold and silver fell 15% to 35% in the last month, these portfolios barely fell — maybe 2–3%. That is the beauty of multi-asset investing. Something will not do well at all points in time. You will always have losers in the portfolio, but they could be your future winners — which, left to yourself, you may not own at the right time. Something will always do well in the portfolio, and that is the beauty of multi-asset investing.
However, the time horizon for multi-asset investing still needs to be at least five years, not one year.
Kshitij Anand: How often should asset allocation be reviewed? Should it be annual or tactical? Can retail investors successfully time asset classes?
Kalpen Parekh: I think the classification of retail versus non-retail is unfair. The real distinction is between those who understand markets and those who do not. It is wrong to assume retail investors do not understand. Many retail investors have the intellect and time to learn and apply these concepts. At the same time, many wealthy, sophisticated investors may not fully understand them.
If you have the capability to understand markets and cycles, you can think of rebalancing either once a year or when an asset class moves to extremes — when its weight in your portfolio goes off track, either too low or too high.
That is a good time to consider rebalancing and revisiting the setup. Has something fundamentally changed to justify the sharp move?
For example, long-term returns of precious metals over 30–40 years are typically between 8% and 11%. If, in the last year, they have delivered 150%, or in two years 300%, that is far away from long-term averages. That is unnatural. They may have recovered from below-average to above-average returns, and that explains the sharp gains. But the portfolio weight would also have gone off track.
For example, I had around 10% in precious metals 18 months ago. That 10% became nearly 20% because gold and silver rose sharply while other assets remained sideways. Now I must ask myself — in today’s setup, should I have 20% in gold and silver?
Headlines may push me to increase exposure. They may say inflation will rise, central banks are buying, the world is fragile. But central banks were buying four years ago too. The world has always been fragile. Money printing started in 2008. What has fundamentally changed?
Unless there is genuinely new information to justify a higher allocation, and valuations are still reasonable, it may be wiser to gradually bring 20% back to 10% — or first reduce it to 15%. Chasing a fast-moving asset class is dangerous. If a fast-moving train does not stop at the platform and you try to board it while running, there will almost certainly be accidents. The same happens with asset classes that are running too fast.
Rebalancing should happen when allocations become distorted. Reviewing annually is reasonable because typically things do not change drastically within a year.
Kshitij Anand: If someone wants exposure to real estate through alternatives such as REITs or InvITs, or commodities — how are they structured, and should one consider them?
Kalpen Parekh: One of my fund managers mentioned recently that he gradually started trimming exposure to REITs, probably because they have run up sharply over the last 18 months. This is a good opportunity to remind investors to always have a framework before investing.
Statements such as “REITs are a hedge against inflation” or “this is the era of hard assets, so buy REITs” may sound attractive, but they must be backed by facts and data.
REITs are not straight-line bonds delivering higher equity returns. They can be as volatile as equities. If you look at the global history of REITs — although in India the history is short, only two to three years — and the number of REITs is limited, real estate as a sector has historically had issues such as free cash flow concerns and governance challenges. It is improving, and more REITs will come, but we must proceed cautiously.
When REITs have already run up 30%, 40%, or 50%, one should not get carried away. Even equities do not compound at 30–40% consistently. A one- or two-year return does not justify over-allocation based on a general statement like “they are a hedge against inflation.”
REITs can have standard deviations of around 17, which is very similar to equities. That means they fluctuate both upward and downward like equities. Investors need to be mindful of that and avoid investing blindly.
Kshitij Anand: We also talked about rising geopolitical risks. However, US and European markets have delivered strong returns compared to India. At this stage, should portfolios be globally diversified?
Kalpen Parekh: I think the framework of diversification should not revolve around India, China, the US, or Russia. Countries themselves do not make money — businesses do. If you choose a country, that country has hundreds of stocks. So if I say the US looks good, how do you decide which part of the US looks good? It may sound intelligent, but it has little actionable value.
Instead, I would offer a more practical framework. Diversification should not be country-based. The principle should be whether you are buying asset classes at a fair price or below fair price. Today, we should think in terms of equities — whether Indian or global — assuming geographical boundaries do not exist.
There may be ten very good companies in India available at fair or below fair value. There may be five in Asia — say China, Korea, or Japan — at attractive valuations. There could be strong businesses in Italy or France, one in Canada, two in the Netherlands, or six in the US. So global diversification is not about choosing a country, because every country has both bull and bear markets at the same time.
Even in India this year, markets may be up 8–9%, but tech stocks could be down 20%, metal stocks up 30%, pharma and consumer stocks down, while bank stocks are up. Within banking itself, some stocks may be down 20% and others up 15%. So broad statements about markets are rarely meaningful.
The key is understanding what type of companies create wealth over the medium to long term. Typically, businesses where free cash flows are rising, and which are available at fair or attractive prices, tend to perform well. That should guide allocation decisions.
For investors who do not have the time to study global businesses, it is better to invest through mutual funds that diversify globally. For example, we launched a retail fund that allows investors to use the LRS guidelines of the Reserve Bank of India to invest abroad through GIFT City. We started with a $5,000 ticket size to make it accessible to retail investors.
If you look at our current portfolio, 9 out of 22 stocks have fallen between 30% and 70% over the last three to five years. These stocks are currently in a low cycle. While many say markets are expensive and ask when corrections will happen, there are already parts of the world where corrections have played out and high-quality businesses are available at reasonable prices. That should be the framework for global diversification — not simply a country-based approach.
Kshitij Anand: That brings me to my second-last question, which I am sure will interest many viewers. If you had to design a 2026-ready multi-asset portfolio, what would it look like?
Kalpen Parekh: Whenever you mention a one-year horizon — and we are already partway through the year — it becomes tricky.
Kshitij Anand: No, I mean building it in 2026 with a five-year horizon.
Kalpen Parekh: I usually say, show me your portfolio rather than your market view. Portfolio construction depends on each investor’s behaviour, understanding, and risk profile. So please take my answer with that caveat. But I can tell you how I would think about allocating ₹100 today.
Kshitij Anand: Absolutely. Percentages are good enough.
Kalpen Parekh: My approach is always long-term focused. Five years is more medium term, but even then, growth must be a key part of the portfolio — which means equities of businesses with strong cash flows.
I would also want a defensive component. Typically, gold and precious metals act as defence when equities do not perform well. However, today we are in a special situation where the defensive asset — precious metals — has run up sharply and may see heightened volatility. There have been long periods where gold and silver delivered zero returns or even fell 30–40% over five to ten years.
So allocation decisions are slightly more complex right now. But broadly, I would split equities roughly equally between Indian and global stocks — say about 33% each. I would keep around 25% in bonds, which in India earn about 7–8%, and which can be deployed during periods of higher volatility in equities or precious metals. Around 10% I would allocate to precious metals.
That is how I would structure my portfolio today. But this allocation works for me — yours could be different. For 100 viewers, there could be 100 unique portfolios.
Kshitij Anand: In fact, when you mentioned that the kind of inflows we saw in gold ETFs last month were higher than those in equity funds, it clearly reflects investor behaviour. So yes, to a large extent, you have explained how behaviour works from an investor’s point of view. I am sure the last question is equally interesting — what is the biggest mistake investors make while diversifying?
Kalpen Parekh: As I said earlier, this ties back to your first question. I do not think investors genuinely think about diversification.
If you look at mutual fund flows, every year there is one central category that attracts most of the inflows. This year, it started with precious metals getting the maximum flows. Last year, it was the small- and mid-cap category. Before that, it was thematic funds. Many hot funds were launched because those themes were performing well — manufacturing, infrastructure, industrials, engineering, defence — and they received most of the inflows.
So whatever is doing very well tends to polarise investors’ capital. Personally, I do not see genuine diversification. There is often no clear framework to decide how to invest. The only framework that drives most of us — and I was guilty of this myself in the first 10 years of my career — is to check which asset or fund has done well in the past year and then invest in it. We assume that what performed well last year will continue to perform well next year. But many investors do not understand concepts such as cyclicality and mean reversion.
Investors need to learn these principles when building portfolios, or they should seek a good advisor who can guide them.
Another common mistake is owning too many mutual fund schemes. For example, an investor may hold 20 schemes, but each scheme ultimately invests in a similar set of 40 stocks. So through 20 schemes, you are effectively owning the same 40 stocks repeatedly. The outcome will not be very different. In contrast, owning three or four well-diversified equity funds run with slightly different investment styles may lead to a better outcome than holding 20 schemes.
Similarly, some investors may hold 50, 60, or even 70 stocks in their portfolios. That sounds diversified, but if the quality of those businesses is poor, the results will not improve. If you ask investors, “What is the return on capital of the companies in your portfolio? Can these businesses generate sustainable returns? Do they know how to run their operations efficiently?” most people would not know the answers. Many may not even know what ROE or ROC means.
Today, there are significantly more investors directly investing in stocks than through mutual funds. The assumption is that one can buy stocks and make money. Some investors certainly can generate better returns than mutual funds because they have flexibility in portfolio construction and time horizon. But blindly building portfolios without understanding the rules of the game — without analysing accounting quality or whether financial numbers are reliable — can be risky.
In fact, we conducted an exercise two or three years ago. We found that stocks with the highest number of retail shareholders were often companies that had not generated returns on capital above their cost of capital over the past five to ten years.
These are important learning points. We always tell investors that it is not necessary to invest all your money in mutual funds. If you can learn and build a disciplined framework, you can certainly outperform us. By all means, do that. But do not do injustice to your money by investing without understanding the basic rules of the game.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)