Why Rebalancing Beats Chasing Returns in Volatile Cycles

Market volatility often tempts investors to chase recent winners, but disciplined rebalancing remains the primary defense against cyclical extremes. Kalpen Parekh, managing director and chief executive officer of DSP Mutual Fund, recently highlighted the necessity of ignoring market noise in favor of mean reversion. When asset classes experience outsized gains, the reflexive urge to increase exposure often leads to buying at the top of a cycle. Instead, Parekh advocates for a systematic reduction of positions that have outperformed their historical norms, shifting capital into segments that have lagged but retain strong underlying fundamentals.

The Mechanism of Cyclical Rebalancing

Parekh’s approach relies on the observation that asset classes are inherently cyclical. Over the past 18 months, gold and silver delivered returns that historically might have taken two to three decades to accumulate. This rapid appreciation pushed his gold allocation to approximately 22% of his total portfolio, significantly above his target range of 10% to 15%. Rather than viewing this as a signal to increase exposure, he treated it as a mandate to rebalance. By trimming gold mining funds, he redirected liquidity into hybrid strategies, including value funds, equity savings funds, and multi-asset funds.

This shift serves a dual purpose. It locks in gains from the outperforming asset while simultaneously increasing equity exposure through vehicles that automatically recalibrate based on market conditions. Parekh noted that his overall equity exposure has increased by roughly 7% over the last six months, a move facilitated by the mechanical nature of his hybrid fund holdings which increased equity allocations as broader markets corrected. This is a practical application of mean reversion, where the investor avoids the trap of extrapolation—the belief that because an asset has performed well, it will continue to do so indefinitely.

Valuation and the Global Opportunity Set

For investors looking beyond domestic markets, geography is secondary to business quality and valuation. Parekh maintains a 25% allocation to global equities, focusing on businesses that generate free cash flow and are available at reasonable prices. While AI and semiconductors have dominated recent market narratives, he points out that many core sectors across Asia, Europe, and Canada have seen corrections of 20% to 40% or have traded sideways for years. This divergence creates a landscape where opportunities are emerging, though few sectors are currently screaming cheap.

In the domestic market, the valuation picture is similarly nuanced. While some pockets of the BFSI sector are approaching fair value, select small-cap stocks—specifically those with strong management and solid business models—have corrected by 30% to 40%. IT stocks have also undergone a period of price adjustment. These corrections are not necessarily signs of systemic failure but rather the natural cooling of overextended valuations. For the long-term investor, these periods are not for panic but for identifying assets that have been unfairly punished by broader market sentiment.

The Role of Fixed Income as Dry Powder

Fixed income serves two distinct functions in a balanced portfolio: behavioral stability and liquidity. Parekh maintains 20% to 40% of his portfolio in debt mutual funds, adjusting the weight based on equity valuations. When equities are expensive, he leans toward the 40% mark; when valuations are reasonable, he moves toward 20%. This allocation is not merely for yield; it is the "dry powder" required to act when markets provide entry points. Without this liquidity, an investor is forced to rely on incremental savings, which are rarely sufficient to capitalize on significant market corrections.

This strategy contrasts with the common, yet often ineffective, practice of seeking alternative investments. Parekh remains skeptical of assets that fail to outperform equities after accounting for costs and taxes. Real estate, for example, is often hampered by liquidity and execution challenges, leading him to limit his exposure to his primary residence. By sticking to a core of equities, bonds, and gold, he maintains a structure that is both manageable and transparent.

Managing Risk Through Structural Discipline

Maintaining a 10% to 15% allocation to gold provides a hedge against currency and systemic risks, but the timing of accumulation is critical. Parekh emphasizes that gold should be accumulated when it is underperforming, not when it is in the midst of a historic rally. His own experience of buying during an eight-year period of stagnation underscores the importance of patience. This disciplined approach to diversification is a core tenet of his philosophy, ensuring that the portfolio is not overly reliant on any single asset class during periods of geopolitical or economic stress.

Ultimately, the goal is to avoid the temptation to exit underperforming assets to chase winners, which Parekh identifies as the single greatest destroyer of long-term returns. By ignoring monthly SIP numbers and FII flows, he focuses on maintaining a consistent asset allocation. This framework is designed to survive the noise of market cycles, ensuring that the investor remains positioned to capture long-term compounding rather than reacting to the transient narratives of the day. As seen in WELL stock page, which carries an Alpha Score of 50/100, maintaining a balanced view across sectors remains a critical component of risk management in the current environment.