Asset class performance in 2025: What worked, what didn’t

Returns from investments are the best indicator of how various asset classes have performed. And that helps investors determine which asset class is a winner and which ones to avoid.

While the winners among asset classes keep rotating every year, the absence of any such pattern over the past 10 years reinforces the importance of asset allocation in building a balanced portfolio. Here’s a quick look at the performance of different asset classes in 2025.

Gold

Gold was the standout performer of 2025, delivering a remarkable 70% return—its strongest show in more than a decade. The returns data is based on Nippon India ETF Gold BeES' returns as of 12 December 2025.

The gold rally was supported by a softer US dollar and an unsettled global environment marked by prolonged geopolitical conflicts and trade tensions. But the momentum ran deeper.

Central banks, particularly in emerging markets, continued to accumulate gold at a record pace as part of a broader diversification away from the dollar. Expectations of a turn in the US interest-rate cycle further strengthened gold’s appeal by compressing real interest rates and lowering the opportunity cost of holding the metal.

Persistent inflation risks, periodic volatility in global equities and steady physical demand from India and China reinforced gold’s role as a portfolio stabiliser when macroeconomic uncertainty remained elevated.

“Gold has delivered strong returns recently, but investors should not assume it is a low-volatility safe haven," said Devina Mehra, chairperson and founder of First Global. “In dollar terms, gold has been highly volatile historically and has gone through prolonged and deep drawdowns after sharp rallies, with recovery periods often stretching far longer."

Much of gold’s strong performance in rupee terms reflects currency depreciation rather than price stability, Mehra said. Gold has a role in portfolios, but investors must approach it with an understanding of its cyclicality, she said.

Other experts remain constructive on gold’s outlook even after the sharp rally.

“Fundamentals continue to strongly support a prolonged gold bull market, although bouts of volatility and headline-driven moves are likely as global conditions evolve," said Chirag Mehta, chief investment officer at Quantum Mutual Fund. “We could be entering a phase where the US economy weakens enough—especially evident in labour market data—to prompt the Federal Reserve to ease monetary conditions, even as signs emerge of a fresh inflationary impulse. That combination would create an ideal macro backdrop for gold to extend its gains."

Mehta also pointed to structural factors that continue to underpin demand for the metal.

“With US debt levels at record highs and policy responses increasingly reliant on liquidity support, the case for diversifying reserves away from fiat currencies remains intact," he said. “Gold stands out in this environment, and the ongoing under-allocation to the asset across portfolios suggests there is still room for investors to build exposure over time."

Mehta added that investors should typically allocate about 15% of their portfolio to gold. Those who are under-allocated, or just beginning to build exposure, could invest in a staggered manner.

US equities

The S&P 500, which represents the US stock market, emerged as the second-best performing asset class in 2025, delivering returns of 22.9% (as of 12 December 2025) when converted into rupee terms. The gains were driven by a resilient US economy, steady corporate earnings growth and continued investor confidence in large technology and innovation-led companies that dominate the index. Expectations that the US Federal Reserve was nearing the end of its tightening cycle also lifted market sentiment, while easing inflation pressures improved visibility on future growth.

The close-to-5% depreciation of the rupee against the dollar boosted returns for Indian investors, reinforcing the appeal of global diversification when domestic markets were more volatile.

“One of the biggest risks in the US market today is its extreme narrowness. A very small set of technology stocks has driven a disproportionate share of returns, and even within tech, leadership has become increasingly concentrated. When markets become this narrow, risks start building up—especially around whether the massive capital being deployed will actually generate returns on equity," Mehra explained.

Indian stocks

Indian equities delivered a mixed performance in 2025, with returns diverging sharply across various market capitalisation segments. Large-cap stocks, represented by the BSE 100 Total Return Index, gained about 10% (as of 12 December 2025), supported by relatively stable earnings and investor preference for balance-sheet strength amid global uncertainty.

Mid-cap stocks, tracked by the BSE 150 MidCap TRI, posted modest gains of about 3% as higher valuations and selective earnings disappointments tempered risk appetite. Small-cap stocks, represented by the BSE 250 SmallCap TRI, struggled through the year and declined by almost 6%, as tighter liquidity conditions and risk aversion prompted investors to move away from the riskier end of the market.

Small-cap stocks are considered more volatile because they have less predictable earnings, thinner liquidity, weaker balance sheets, and higher sensitivity to economic or market shocks, which make their prices far more volatile.

Fund managers are optimistic on the domestic stock markets, but advise some caution. Nilesh Shah, managing director of Kotak Mahindra Asset Management Company, said in a note, “Equity returns in FY2026 are likely to be anchored in earnings growth, with India Inc expected to deliver double-digit growth in FY27. This strength is likely to attract foreign portfolio investors, supporting market liquidity. Midcaps are poised to outperform large- and small-caps, though the margin of outperformance may remain narrow. Investors are advised to moderate return expectations and adopt a balanced, diversified approach across asset classes to navigate evolving market dynamics."

Debt markets

In the debt markets, government securities (G-Secs) were subdued compared to last year. The CCIL All Sovereign Bond Index that represents G-Secs was up 5% in 2025 (data as of 30 November 2025), compared with 10.5% in the previous year.

“Even as policy rates have eased, long-term government bond yields have stayed elevated, reflecting structural pressures rather than monetary stance. Banks have been net sellers of G-Secs as deposits have been hard to mobilise, while incremental demand from pension and long-term investors has softened," said Dwijendra Srivastava, chief investment officer, fixed income, at Sundaram Mutual Fund. “The rupee’s adjustment to a more realistic valuation and the RBI’s currency management have helped contain volatility, but these measures have not translated into durable liquidity or eased the underlying demand-supply imbalance in the G-Sec market."

Treasury bills (T-Bills) — represented by CCIL T-Bill Liquidity Weight Index — gained 4.3% (as of 30 November 2025).

Credit risk — represented by the Crisil Composite Credit Risk Index — was up 8.3% in 2025 (as of 1 December 2025). The Crisil Corporate Bond Composite Index was up 7% in the same period.

“Credit growth remains strong in absolute terms, particularly in retail and SME (small and medium enterprises) segments, but the best part of the cycle is likely behind us. Elevated funding costs, heavy reliance on CDs (certificates of deposits), and tighter liquidity have kept spreads high. Currency volatility also adds another layer of risk—especially for borrowers with external exposure—making weaker credits more vulnerable to stress or downgrades if growth slows and funding conditions tighten further," Srivastava said.

The debt market faces a persistent supply-demand mismatch, and the currency dynamic is an important part of that stress, he said. Even after rate cuts, liquidity has not been durable, transmission has been weak, and spreads remain wider than historical norms.

“At the same time, the RBI’s forex operations have added liquidity episodically, but that has not translated into long-term funding comfort, especially as deposit growth lags credit demand," Srivastava pointed out.

Real estate

Real estate returns were marginally higher in 2025. The RBI’s House Price Index was up 0.9% at the end of the second quarter of FY26 (September quarter) from the end of the December quarter last year. This is based on provisional data.

“Residential demand has somewhat stabilized in 2025, with sales volumes plummeting over the quarters amid headwinds including high prices, global slowdown, geopolitical tensions. New launches have also remained somewhat subdued as compared to previous years," said Anuj Puri, chairman of Anarock Group. “While we are still collating the exact numbers, current trends indicate that housing sales across the top seven cities may see an up to 15% yearly decline in 2025 as against 2024 due to the factors mentioned above. Nevertheless, our research also reveals that while overall sales volumes may decline, sales values may see yearly growth of anywhere between 5-10% in 2025."

According to Puri, residential real estate performance in 2026 hinges on factors including the repo rate and prices. If repo rates are further reduced in early 2026 and banks slash home loan rates, there may be an uptick in demand by homebuyers who have been sitting on the fence. Additionally, developers must keep their prices in check to push sales.

“Both these factors, coupled with the current positive economic outlook in the country, may help boost residential market momentum in the new year," he added.