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In a global landscape marked by trade wars, AI-driven disruptions and a changing world political order, investors are navigating a period of profound economic, technological and geopolitical transformation.
Portfolio allocation, once driven by static models and broad rules of thumb, must now be more dynamic and forward-looking, seeking opportunities across asset classes and geographies. Investors who adapt to this new normal stand to benefit meaningfully.
A new market reality
We have moved from an era of ultra-low interest rates and abundant liquidity into one of higher inflation, interest rate normalisation, and increased economic and geopolitical uncertainty. These shifts are influencing asset-class behaviour in significant ways — equity valuations are being tested, bond markets are repricing risk, and alternative assets are gaining investor attention as traditional diversification approaches become less effective.
In India, despite a compelling structural growth story driven by formalisation, digitisation and consumption, risks such as global supply chain disruptions and rupee volatility loom. The Nifty 500 has delivered about 12.5 per cent annualised returns over the past decade, but forward P/E ratios at 21x may signal potential valuation concerns.
Principles of dynamic allocation
Portfolio allocation strategies must balance opportunities with these risks and a robust one rests on a few key principles.
Thoughtful diversification: True diversification is not just a spread of asset classes, but involves targeting uncorrelated sources of return and risk. This might mean blending domestic equities with global exposures, adding fixed-income instruments of varying duration and credit quality, and thoughtfully incorporating alternatives like REITs, InvITs, private equity or gold.
Risk-based allocation: When constructing portfolios, we advocate a risk-based approach where investors focus on how much risk they can tolerate, financially and psychologically. For example, a family office may accept more illiquidity in pursuit of higher long-term alpha (excess returns over a benchmark) through private equity, while a retiree may prioritise safety and income typically available from fixed-income instruments.
Tactical adjustments: While strategic allocation anchors the portfolio, tactical tweaks can enhance a portfolio’s risk-adjusted returns. For instance, reducing Indian mid-caps when valuations are stretched (currently about 27x) and earnings momentum is tepid, or increasing international exposure when the rupee is overvalued, are tactical moves grounded in macro and valuation considerations.
Cash as a tool: In uncertain markets, holding 5-10 per cent in cash provides optionality. Despite inflationary concerns, cash offers dry powder for redeployment when opportunities arise. The key is staying selectively liquid, not underinvested.
Equity allocation
Indian equities remain a favoured vehicle for wealth creation, and for good reason. As a class, they have performed well in both relative and absolute terms, and the long-term outlook remains compelling, supported by demographic tailwinds, a reform-oriented government, and healthy corporate earnings.
A core-satellite approach works well here. The core, typically 60-70 per cent of the equity allocation, should be in high-quality businesses or diversified mutual funds. The satellite can take a more thematic approach, such as individual factors like momentum or low volatility, or emerging sectors like EVs, AI and manufacturing. Aside from mutual funds, direct equity, portfolio management services (PMS) or even focused ETFs can play a role.
Increasingly, global equity exposure represents a core component. It mitigates domestic concentration risk and provides access to sectoral opportunities not readily available in India. Given current valuations, however, investors may consider restricting exposure to the US, especially mega-cap tech stocks, in favour of Europe, Japan and emerging Asia, which offer more compelling relative value.
Fixed income
With the RBI having eased rates by 50 basis points and liquidity remaining manageable, Indian bonds have risen recently. Further, despite global uncertainty, foreign inflows have remained robust. Yields across high-quality debt have stabilised at 6.5-7.5 per cent and significant gains from adding duration are unlikely.
Short-to-medium duration bonds and funds, and carefully-selected credits offer income with low volatility. For those willing to move up the risk curve, select credit or hybrid debt instruments can enhance yields to 8-10 per cent.
Alternative assets
Alternatives are no longer just for institutions. Indian HNIs and family offices are increasingly allocating to private equity, structured credit, venture debt, REITs and InvITs. These assets, though illiquid, offer higher returns of 15-20 per cent with less correlation with public markets. Gold, too, continues to serve as a useful geopolitical, inflation and currency hedge, returning about 13.5 per cent per annum over the past five years.
Behaviour matters
An underappreciated factor in investing success is investor behaviour. Asset allocation works only when it is consistently followed. Rebalancing, resisting the urge to excessively time the market and aligning investments with goals and risk appetite is where discipline meets performance.
Markets are constantly evolving, but a disciplined approach to asset allocation is enduring. Review your portfolio’s alignment with these principles and consider consulting a wealth advisor to tailor strategies to your goals in this dynamic landscape. For retail investors looking to delegate the asset-allocation process to professional managers, we are also seeing the emergence of multi-asset allocation funds that may substantially do the job for them.
The author is Founder & CEO, Sanctum Wealth.
Recommendations on investment and asset allocations are those of the author and not of bl. portfolio.
Published on May 10, 2025
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