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

Indian markets have been in a consolidation phase for two years, with gold emerging as a strong performer. DSP Mutual Fund's Kalpen Parekh advises investors to focus on asset allocation instead of chasing recent returns. He recommends gradually increasing equity investments after a correction, keeping debt for stability and liquidity, and treating gold as a diversifier rather than a momentum play.

Parekh emphasizes that markets have delivered strong returns in recent years, but valuations had moved ahead of earnings. This two-year consolidation period allows earnings to catch up with prices, making it an ideal time for long-term SIP investors. Accumulating more units at lower prices during these periods can pay off in the long run as markets recover and earnings grow.

For a young investor with ₹10 lakh to invest this Diwali, Parekh suggests allocating the money based on individual goals, investment horizon, and risk tolerance. Passive funds and multi-asset funds are good starting points for those unfamiliar with investing. Mid- and small-cap funds may be considered if the investment horizon is 10 years or more, but investors should be prepared for higher volatility. Debt should also be included in the portfolio to provide stability and flexibility for future investments.

When cash is sitting on the sidelines after a recent correction, Parekh advises slowly adding back equities as sharp corrections in large caps have occurred. However, investors should remember that equity investing requires a time horizon of at least 5 to 7 years, with ups and downs along the way. A balanced asset allocation portfolio should vary depending on the investor's goals and market cycles, with rebalancing occurring once or twice a year to manage risk rather than predict market movements.