Investment professionals and financial planners have long advocated a properly diversified investment portfolio. Investors who work with a financial advisor and follow that advice will generally have a reasonably balanced portfolio. DIY (do-it-yourself) investors, however, tend to chase returns, allocating more to the asset class that has delivered higher returns or one they are more comfortable with.
For many investors, that asset class is equity. More conservative investors, or those who have not yet ventured into equities, tend to favour fixed-income products such as fixed deposits. The practical implications of an equity-heavy portfolio are worth examining.
Current situation
Since the peak in September 2024, Indian equity markets, measured by the Nifty 50 and Sensex, have delivered negative returns of roughly 7-8%. There is no fundamental question over the long-term growth prospects of the Indian economy or corporate sector. And over the long history of equity markets, corrections of 30-50% are not unusual. Data shows that even after such corrections, investors who stayed invested have, over time, earned decent returns.
Equity-market corrections broadly take two forms: price and time. A price correction is a sharp fall in prices, say 30-50%. A time correction occurs when the market goes nowhere for an extended period—perhaps a year or several years—leaving investors with little or no return, or returns lower than what a bank fixed deposit might offer.
The current phase is closer to a time correction. Returns have been negative, but the decline has not been particularly deep. The key question, therefore, is how long it takes for the market and earnings to regain momentum.
Concentration risk
For equity-heavy investors, this is a time for review and reflection. As history shows, both price and time corrections are part of investing. The question is whether you want a smoother investment journey or are comfortable with the bumps along the way.
Over the past one-and-a-half to two years, an investor with a properly diversified portfolio spanning equity, fixed income, gold and other asset classes, based on their profile and objectives, would have earned decent positive returns.
The basic premise of market-based investing is that returns come with risk: the higher the risk, the higher the expected return. The important word is “expected”, not guaranteed. Higher risk also means a greater possibility of falling short of the expected return.
Cryptocurrency is an extreme illustration of the high-risk, high-return proposition. At one point, Bitcoin delivered spectacular returns, but the risk was equally high. With no underlying cash flows or earnings to anchor its value in the way there are for equities, its price depends heavily on expectations of future demand and appreciation. After a correction, investors who bought at high prices can remain stuck with steep losses.
At best, Bitcoin warranted only an allocation that an investor could afford to ignore without losing sleep.
That is not to equate equity with Bitcoin. Equity has a fundamental basis in the growth and profitability of the underlying businesses. The broader point is that every asset class—equity, fixed income, gold and others—has a history of adverse phases.
One way of assessing this risk is through drawdown: how much an asset loses from a peak during a bad phase. As an illustration from the not-too-distant past, equity markets fell roughly 38% between January and 23 March 2020, at the index level.
These are paper losses until an investor sells, but the size of a potential drawdown provides a useful perspective on how much space an asset class should occupy in a portfolio. Investors, particularly those without professional advice, often look at recent returns and immediate prospects while underestimating the range of outcomes over a full market cycle.
Stay the course—or diversify
If you are convinced that an equity-heavy portfolio suits you, have a sufficiently long investment horizon—say 10 years or more—and are comfortable with periodic price and time corrections, staying the course can make sense.
But if you accept the conventional wisdom that nobody knows the future or precisely how much any asset class will return, a balanced and diversified portfolio is more appropriate. This is particularly relevant for relatively new investors who have not experienced a major market correction. A 30-50% fall can look like just another statistic until you experience its impact on your portfolio.
History also shows that no single asset class—equity, debt or gold—has consistently outperformed year after year. Unless you have become overly committed to one particular asset class, a “balanced diet” remains a sensible approach to investing.
Joydeep Sen is a corporate trainer (financial markets) and author.