Mumbai, May 12, 2025
WISE MIX. In a dynamic marketplace, allocation must be forward-looking, diversifying across asset classes and geographies.
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 behavior 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 like global supply chain disruptions and rupee volatility loom. The Nifty 500 has delivered ~12.5% annualized 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 ~ 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% in cash provides optionality. Despite inflationary concerns, cash offers dry powder for redeployment when opportunities arise. The key is staying selectively liquid, not under-invested.
Equity Allocation: Core and Satellite
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% 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 U.S., especially mega-cap tech stocks, in favour of Europe, Japan, and emerging Asia, which offer more compelling relative value.
Fixed Income: Stabilising the Portfolio
With the RBI having eased rates by 50bps 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% 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%.
Alternatives: Enhancing Diversification
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% with less correlation with public markets. Gold, too, continues to serve as a useful geopolitical, inflation and currency hedge, returning ~13.5% p.a. over the past 5 years, albeit at current levels, caution is advisable.
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.
In Conclusion
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.
Shiv Gupta, Founder & CEO Sanctum Wealth
Featured in The Hindu Business Line
For more information, please visit www.sanctumwealth.com
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