Stock market turbulence: Why US-Iran war is a wake-up call for diversification, asset allocation

Geopolitical tensions like the ongoing West Asia conflict have once again shaken investor confidence. With the Nifty correcting by 10.2% since the escalation in March, most Equity portfolios have mirrored this fall, exposing a hard truth: equity-heavy investing without asset allocation can be painful.

Market turbulence of this nature is not just about losses; it’s a wake-up call. Investors who once ignored diversification are now actively searching for assets that can withstand such uncertainty. But the reality is more nuanced. There is no single asset that is completely immune to geopolitical shocks.

Gold: A Safe Haven That Faltered This Time

Traditionally, gold has been the first line of defence during crises. It has historically surged during wars and global instability. However, this conflict has rewritten that narrative.

Gold has corrected as much as the Nifty in the last 1 month. The reasons lie in the broader macro environment:

• Crude oil prices have surged nearly 60% (from $72 levels per barrel)
• Inflation concerns have intensified
• Interest rate hike expectations have strengthened
• The US dollar has appreciated sharply
• Central banks have paused gold buying; some have been selling gold reserves

This combination has temporarily weakened gold’s safe-haven appeal.

Gold still has a role but it is not a guaranteed hedge, especially in conflicts driven by oil and inflation dynamics.

Debt: Stability When Everything Else Is Volatile

In recent years, many investors’ portfolios have become equity-heavy to chase the momentum in equity markets. The equity concentration has become regrettable in the current scenario.

In contrast to the noise in equities and commodities, debt continues to do what it does best, preserve stability.

Fixed income instruments, especially Fixed Deposits and high-rated corporate deposits, offer predictability:

• Interest rates up to 7.5% (8% for senior citizens) offered by high rated company deposits
• No linkage to market volatility
• No mark-to-market shocks in traditional deposits
  

In the greed to make high fixed returns, do not chase high yield bonds and deposits, as that can hurt the capital too. Small investors ideally should stick to AAA or AA+ rated debt bonds and deposits only.

Rising interest rates can impact bond prices. So, investors need to be mindful of duration risk when choosing bond funds.

Debt may not generate excitement, but it provides much-needed balance when markets are turbulent. Investors on the high tax slabs need to digest the fact that interest paid is taxed at their tax slab.

Balanced Advantage Funds: Built for Market Cycles

Balanced Advantage Funds (Dynamic Asset Allocation Funds) are proving their relevance in the current environment. These funds dynamically adjust equity exposure based on valuations and opportunities.

A typical structure includes:

• 40–50% core equity (dynamic)
• 15–25% arbitrage exposure
• 35% high-quality debt

Because of this flexibility, these funds have managed to limit downside. The more conservative ones have corrected only about half of the Nifty’s fall in the last month.

They also offer tax efficiency with long-term capital gains generated after 1 year taxed at 12.5% despite having meaningful debt exposure.

For investors who cannot actively manage allocation, these funds do it for them systematically and without emotion.

Ultra Conservative Dynamic Asset Allocation Funds: Cushioning the Fall

Some Dynamic Asset Allocation funds go a step further in protecting capital by maintaining very low equity exposure.

• Core equity: <15%
• Total equity (including arbitrage): 35% or above

These funds have shown remarkable resilience, correcting only 0–2% versus Nifty’s 10% decline.

While taxation is slightly different (slab rate in the short term of up to 2 years, 12.5% in the long term), the capital protection they offer during drawdowns stands out.

They are ideal for investors who want stability without completely exiting equity exposure.

Multi Asset Funds: Diversification Done Right

Multi Asset Funds bring together multiple asset classes under one portfolio. They can allocate across:

• Equities and derivatives
• Debt instruments
• Commodities
• International equities
• REITs and InvITs

The allocation is dynamic, allowing fund managers to shift between assets based on market conditions.

Within this category, investors can choose between:

• Moderate equity exposure (35–64%)
• Aggressive equity allocation (65%+)

The taxation differs based on the domestic equity exposure as mentioned in the case of Dynamic Asset Allocation Funds.

No dependence on a single asset class to drive returns. Multiple asset classes offer an opportunity to enhance returns and minimise downside.

Global Diversification: The Missed Shield

One of the most underappreciated lessons from this phase is the importance of geographical diversification.

While Indian markets have corrected sharply, several global markets have fallen far less or remained relatively stable over the last month. While Indian equities corrected 10.2% in March, markets like the US, China, Hong Kong, and Brazil corrected by just half or lesser.

The year 2025 also saw many global markets outperforming India significantly. When Nifty delivered 10.5% in 2025, Korea, Japan, South Africa, Germany, Brazil, Hong Kong, Taiwan, the US and China and the US delivered 75.6%, 26.2%, 37.7%, 23%, 34%, 27.8%, 25.7%, 17.3% and 18.4% respectively.

This divergence highlights a critical point that Geopolitical events impact regions differently, not uniformly.

For instance:

• Some developed markets have shown lower volatility due to lower direct exposure to oil shocks
• Certain emerging markets have been less impacted due to different macro drivers
• Currency movements (like a stronger dollar) have actually supported returns from international allocations in INR terms

This means that portfolios with global exposure have experienced far lower drawdowns compared to India-only portfolios.

Ways to achieve global diversification include:

• International mutual funds
• US Feeder funds investing in global indices
• Emerging market funds with multi-country exposure
• Gifty City Funds
  

Investing in global stocks directly may not be for small investors, as that needs great expertise.

If your entire portfolio is tied to one economy, you are taking a concentrated macro risk without realising it and so geographical spread makes great sense

Specialised Investment Funds (SIFs): Playing Both Sides

Specialised Investment Funds (SIFs), the recently launched investment category, particularly Hybrid Long-Short Funds, are designed to navigate volatility using advanced strategies.

They typically allocate:

• Minimum 25% to equity
• Minimum 25% to debt
• Up to 25% short exposure via unhedged derivatives

This allows them to benefit even when markets fall. The shorts exposure adds to the returns even during a market fall.

Recent performance of this categor has been encouraging:

• Top funds have corrected only 0–1.5% in the last month
• Minimum investment is ₹10 lakh
• Strategy complexity is higher
• Long-term consistency is yet to be fully tested due to low vintage

These are best suited for investors who understand and are comfortable with sophisticated strategies like derivatives.

Don’t Chase Safety, Build Balance

In times like these, the instinct is to find “safe” investments and shift aggressively. But that approach often backfires.

No asset class is consistently immune. What works is balance, not reaction.

Geopolitical crises are temporary. But the damage caused by poor asset allocation can be long-lasting.

So, during uncertainties like the current one

• Diversification must include asset classes and geographies
• Stability is as important as growth

The winners are not those who predict crises but those who build portfolios that can withstand them.

The author is Director, Dhanavruksha Financial Services Pvt. Ltd. Views expressed are personal.