What’s stressed, what still works—and where fund managers would invest ₹10 lakh

Psychologists attribute this to a uniquely human tendency of prioritizing short-term gratification over long-term goals. A chocolate hazelnut brownie is an instant mood-lifter, but the rewards of avoiding this sinful temptation will take weeks, if not months, to be evident. However, under some conditions we are likely to reverse our inherent psychological inertia. For instance, someone recently diagnosed with diabetes will be far more motivated to correct his lifestyle than the average person.

Bad news, it turns out, is often a catalyst for improved behaviour.

2025 was one such episode for the markets, delivering a financial wake up call to a large swath of investors. Benchmark indices rose a healthy 10%, yet most portfolios were in the red as small- and mid-cap counters bled. Mutual fund investors were shocked to discover that fixed deposits can outperform them sometimes. Non-equity asset classes like gold and silver had a dream run. Corporate earnings growth remained in single digits. Foreign investors dumped shares at a record pace and the rupee emerged as the worst performing currency in Asia.

All that being said, January is not a month for pessimism. In fact, most money managers are relishing the start of 2026, arguing that the year gone by has firmly set the stage for a rebound and left smart investors with a buffet of opportunities. But as seasoned food lovers will attest, the secret to a hearty meal lies not in how much you gulp down, but in what you put on your plate.

Bulls & beginnings

Just like healthy eating takes a couple of months before it starts reflecting on our waistlines, experts say regulatory steps taken recently are set to show results in the new year.

In a sweeping set of reforms, the Goods and Services Tax (GST) Council cut indirect tax rates on nearly 400 items from 22 September. Data suggests the pass-through was swift and substantial in segments such as vehicles and consumer durables, but far more muted for everyday items including toothpaste, soaps and leather footwear. GST rates on small cars, two-wheelers and consumer durables were lowered from 28-31% to 18%, while household essentials such as toothpaste and soaps were moved from the 12% or 18% slabs to 5%.

This followed the income tax cuts announced in Budget 2025, which made tax liability nil for salaries up to ₹12 lakh, increasing disposable incomes at the hand of consumers.

On the monetary policy front, the Reserve Bank of India (RBI) has delivered a massive 125 basis points (bps) reduction in interest rates over the past 12 months, which is expected to boost liquidity in the market through higher spending in rate-sensitive segments, such as banking, real estate and consumer durables.

“Policy measures implemented during the year, including tax and interest rate reductions, are beginning to yield positive results, which are expected to translate into stronger earnings growth for domestic economy-oriented sectors in 2026," Yogesh Patil, chief investment officer, equity, LIC Mutual Fund Asset Management (LIC MF), told Mint.

The strength of India’s macroeconomic fundamentals, coupled with the expected benefits of recent policy moves, has made this optimism the near-consensus view on the Street.

“We expect festive demand momentum in Q3 results to bring calm to the market as we enter 2026. We remain positive on India equities over the next few quarters as the impact of a reasonably good monsoon, benign inflation and lower prices (due to GST reduction) play out leading to commencement of an earnings upgrade cycle," said Asit Bhandarkar, senior fund manager, equity, JM Financial Asset Management.

Rural wages have started showing meaningful signs of improvement, which augurs well for consumption in the coming quarters. Credit growth signs too are encouraging, he added.

One overhang is the signing of the much-awaited India-US trade deal. Earlier in December, US trade representative Jamieson Greer told the Senate that India has put forward the “best offer the US has ever received," fuelling hopes of a swift conclusion to the trade talks.

The manufacturing theme may see a strong boost if the trade deal goes through, LIC MF’s Patil observed. “Also, capex boost by the government in the ensuing budget may drive the infra and manufacturing themes," he added.

Patil also anticipates a robust earnings growth momentum in emerging sectors such as data centres, green power and higher-end transmission.

Macro and sectoral optimism notwithstanding, a more pressing concern for many investors is how to spruce up their portfolios by applying the lessons of 2025. To that end, Mint asked money managers a simple question: Where would they invest ₹10 lakh today?

A for allocation

For Ajay Arora, co-chief executive officer of Ashika Investment Managers, one of the key takeaways of 2025 was that market breadth matters as much as index levels.

“We saw indices near all-time highs while less than 50% of stocks were above their 200-day moving averages," he pointed out.

The common pitfalls from 2025 that stood out for him were chasing hot themes and without research, overreliance on tips and social media, and lack of diversification and discipline. He also anticipates two major themes to be at play on Dalal Street this year—rise of data-driven strategy funds and potential outperformance of small-and mid-cap stocks (Smids) after a forgettable 2025.

“Given this philosophy, based on an assumption of moderate risk appetite, we would have 30% in data-driven strategy funds, 30% in mid- and small-cap along with dynamic allocation funds, 20% in debt/fixed-income for stability and liquidity, and 20% in precious metals (through the ETFs)," said Arora.

The future of investing is not about choosing one winning asset, but about building resilient portfolios that can adapt across cycles, he added.

Vinod Nair, head of research, Geojit Investments Ltd, said the firm’s 2025 theme proved correct, centered on a multi-asset strategy with 60% in equities and 40% in other assets. “However, within this, we assigned an average 10% weight to precious metals, where prices actually fostered much better by heightened geopolitical risks, trade tensions, central bank purchases and supply constraints," he noted.

With their equity outlook turning marginally more optimistic for 2026, Nair said they are shifting from a multi-asset strategy to a balanced equity approach.

“The revised allocation comprises 85% equity, distributed as 60% large-cap, 15% mid-cap and 10% small-cap, alongside 10% bonds and 5% gold. Our stance on mid- and small-cap investments remains selective, focusing on quality and fundamentals," he added. Key sectors of interest include consumption, infrastructure, banking, real estate and information technology (IT).

While declining to go into specifics, LIC MF’s Patil underlined the importance of constructing portfolios based on sectors with strong earnings growth potential. “Matured businesses in consumption and BFSI (banking, financial services and insurance) may see some uptick in earnings. We have been allocating money to high earning growth sectors such as CDMO (contract development and manufacturing organization), specialty chemicals, green power and businesses associated with new age infrastructure including data centres," he said.

Market experts also point out that domestic equities, though not very cheap, are no longer at stratospheric valuations as last year.

“Hence, we clearly feel the need to increase exposure to equities over the next two quarters. The broader market underperformance should also enthuse high-risk investors to take additional exposure to SMIDs with a longer-term view," JM Financial’s Bhandarkar said.

Forward march

One common theme voiced by market analysts is that after the narrative excesses in multiple segments, it is now time for companies to show earnings growth.

“We are likely transitioning from valuation-driven returns to earnings-driven performance," Ashika Investment Managers’ Arora remarked.

2025 saw sharp cuts in Nifty’s earnings projections for the next couple of years, though many believe the worst may be behind us.

“We expect cuts to moderate as consensus FY26/27 growth estimates at 6%/16% are now close to our estimates at 7%/14%. Growth in FY27 could expand led by pick up in loan growth for financials, discretionary spends aided by GST cuts, telecom tariff hikes, stronger non-ferrous metals and very low base for IT and staples," BofA Securities stated in a note to clients last month.

The global brokerage firm expects the Nifty to offer an 11.4% upside in 2026 and large-caps to outperform small- and mid-caps, similar to trends seen in the year gone by.

“That said, Smid cap now offers some opportunities within financials, IT, chemicals, jewellery, consumer durables and hotel sectors," it said.

Positive surprises are more likely based on potential reforms, likely foreign institutional investor (FIl) outflows’ reversal and an encouraging events calendar—possible RBI and US Federal Reserve rate cuts, fewer large state elections and conclusion of the Pay Commission hike report.

As mentioned earlier, India’s macroeconomic fundamentals are resilient despite global headwinds.

Gross domestic product (GDP) growth surged to a six-quarter high of 8.2% in the second quarter (July-September) of fiscal year 2026 (FY26), up from 7.8% in the first quarter and 7.4% in the fourth quarter of the previous fiscal year.

India has now overtaken Japan to become the world’s fourth-largest economy with a size of $4.18 trillion, and is on course to displace Germany from the third rank in the next two-three years with a projected GDP of $7.3 trillion by 2030, according to government estimates.

This vibrancy is also being reflected in the capital markets, with 2025 seeing a record number of IPOs and funds raised at over ₹1.7 trillion—around 10% more than the previous peak in 2024.

One overlooked aspect is that this spate of new listings is reshaping the market.

“In the past five years, 126 new entrants to the BSE 500 have added 21% to incremental market capitalization. Exits for private equity/venture capitalists via IPOs (initial public offerings), while a drag on the INR in the short run, bode well for inflows, going forward," Axis Capital stated in a recent note.

It expects the market price-to-earnings (P/E) ratio to remain supported on the back of robust demand for equities (as evidenced by steady systematic investment plans, or SIPs, and strong insurance flows).

“We expect 12 month forward earnings (for Nifty) to rise 14% in calendar year 2026. Over and above profits growing faster than nominal GDP, bottom-up analysis also supports earnings resilience. Nearly 46% of incremental FY26-28 index EPS (earnings per share) is estimated to come from financials; the pickup in credit growth helps. Among other major sectors, we expect resilient earnings estimates in IT, energy and industrials," the brokerage added.

While differing in their sectoral and asset allocation choices, most market experts have near unanimity in their positive outlook for 2026. Macro tailwinds and strong domestic liquidity in the form of SIPs and domestic institutional investors (DII) inflows are expected to ensure that the market remains at a decent position. The potential return of FIIs will only add buoyancy to the domestic markets.

To reap the potential benefits, experts argue that investors should prioritise adequate diversification and a patient approach. Long-term potential, they add, should not be overlooked amid short-term volatility driven by crowding or sectoral rotation.

Now that would make a gainful new year resolution for investors to adopt.