Today, the landscape has evolved significantly, with a broader array of asset classes and innovative avenues available to investors.
With Indian equities facing uncertain times—potential disruptions from US President-elect Donald Trump’s policies, Union Budget 2025-26, and foreign investment outflows, among others—experts recommend asset class diversification as a smart way to ride out the volatility.
Shantanu Bhargava, managing director and head of listed investment at Waterfield Advisors, believes the core principles of asset allocation remain constant and that it was just as important in the past as it is today.
However, he noted, “It has become even more critical now, as 2025 is expected to bring heightened volatility due to potentially disruptive impact of Trump’s policies on the global economy and fund flows, China’s slowdown, our economy’s slowdown, and pockets of excessive valuations in our stock markets.”
Over the past four years, equities have had a strong risk-on rally, characterized by the absence of a significant correction, which Bhargava defines as over 20% from peak to trough. He dismisses an 11% decline as merely a drop rather than a true correction. While the risk-on rally has unintentionally paid off for investors with good returns, he advises looking at 2025 more cautiously.
He suggests that investors should embrace the uncertainty and avoid taking risks without intention.
In 2024, all asset classes witnessed an upswing after a prolonged period, said Jayesh Faria, director, regional head, Motilal Oswal Private Wealth Management. However, there is a general consensus that mean reversion is likely to occur, he added.
“Equity valuations are now high, and earnings growth has been slowing over the last two quarters, making asset class diversification more crucial than ever,” Faria said. “With geopolitical tensions, uncertainty around Trump-era policies, and nervous markets, relying solely on liquidity may not be enough to sustain the current return expectation.”
How diversification evolved
Traditionally, Indian investors primarily allocated their wealth to gold, physical real estate, and fixed deposits, viewing these as safer investment options than equities.
However, since the 1990s, tighter regulations from the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi), along with advancements such as dematerialized accounts, quicker settlement processes, the growth of the mutual fund industry, and superior returns from equities, have gradually changed this mindset.
Investors gradually began embracing equities as a viable asset class for generating decent returns, thereby broadening the scope of asset allocation, said Nitin Raheja, executive director of Julius Baer India. “Diversification of asset classes is always looked upon to preserve wealth and adjust risk.”
“Why is asset class diversification so crucial? The reason lies in achieving stable and risk-adjusted returns,” said Nishant Agarwal, senior managing partner at ASK Private Wealth. He added there will be periods when one asset class outperforms others, and diversification helps balance these fluctuations.
Meanwhile, Faria said, “The holy grail of making money is diversifying across asset classes to balance risk effectively.”
“All asset classes will not perform well year after year; so, the key takeaway is that diversification paves the way for more stable returns over the long term,” said Vaibhav Porwal, co-founder of Dezerv.
Emergence of newer categories
Over the last few years, with increased awareness around newer avenues like global equities, exchange-traded funds (ETFs), unlisted equity, private equity, real estate investment trusts (REITs), and infrastructure investment trusts (InvITs), the opportunities to diversify investments have grown even further.
“Every asset class in a portfolio contributes differently to generating overall returns,” according to Hari Shyamsunder, vice president and senior institutional portfolio manager–emerging markets equity, India, at Franklin Templeton.
He said a well-planned asset allocation not only helps achieve one’s short- and long-term goals but also maximizes wealth growth. Moreover, the key to effective diversified asset allocation is including uncorrelated asset classes in the portfolio. This approach balances risk and mitigates the impact of periodic disruptions faced by individual asset classes.
Market participants stress that diversification should go beyond just spreading across asset classes—it should also happen within them, covering areas like sectors, investment styles, and market cap blends. So, diversification not just across the asset classes but within them too, can deliver stronger compound annual returns, they believe.
