For Indian investors who wish to create wealth in the long run, diversification and asset allocation strategies would be more effective than timing the market, as there is no particular asset that consistently outperforms over time, according to market experts.
Notably, experts highlight that nearly 91 per cent of portfolio success depends on asset allocation, underlining the importance of spreading investments across equity, debt, gold and other instruments.
Key questions answered in this article:
- Why should investors focus on diversification instead of timing the market?
- How should investors choose their allocation based on risk profile?
- What is the best strategy for long-term wealth creation?
- What mistakes should investors avoid?
- How many mutual funds are enough for diversification?
- What should investors do during market volatility?
- What is the key to successful long-term investing?
Why should investors focus on diversification instead of timing the market?
In a conversation with Zee Business, mutual fund expert Vishwajeet Parashar and Rushabh Desai, Founder of Rupee with Rushabh Investment Services, highlighted that diversification in a portfolio helps individuals reap profits during all phases of the market, be it during an equity rally or when gold prices surge—while also cushioning against volatility.
Can any asset class deliver consistent returns over time?
“Over the past 40–50 years, no asset class has delivered consistent outperformance. Sometimes equities lead, sometimes debt performs better, and at times gold delivers strong returns. That’s why diversification is critical,” Parashar said.
How important is asset allocation in portfolio success?
According to Parashar, almost 91 per cent of the success of a portfolio depends on asset allocation, emphasising the need for diversification of investments among different types of assets, such as equities, debts, gold, and real estate. Periodic rebalancing will help investors take care of their risks effectively while pursuing their objectives.
Do diversified portfolios perform well in the short or long term?
Parashar also pointed out that while a diversified portfolio may not always appear to be the best performer in the short term, it delivers more stable and consistent returns over time. “The aim is to achieve risk-adjusted returns so that investors can stay invested without panic during market downturns. The longer you stay invested, the more compounding works in your favour,” he said.
How should investors choose their allocation based on risk profile?
Desai recommended that investors simplify their portfolio and make sure it suits their financial objectives, risk profile, and investment horizon. He identified three main types of investors as follows:
1) Conservative investors: They should allocate 70–80 per cent to debt and 20–30 per cent to equities, focusing on the security of capital along with relatively lower returns and a minimum horizon of three years.
2) Moderate investors: They can allocate 50-60 per cent equity and 40-50 per cent debt with a view towards achieving a balanced growth during a four to five-year period.
3) Aggressive investors: These aggressive investors can have 70-80 per cent equity investments along with 20-30 per cent debt investments over an eight to ten-year horizon, targeting higher return, albeit with higher volatility.
What is the best strategy for long-term wealth creation?
For creating wealth in the longer term, especially in an 8-10 year period, Desai advocated for a substantial presence in equities, with diversification among the large-cap, mid-cap and small-cap funds categories. He advised allocating about 35-50 per cent of the equity portfolio to large-cap funds while investing the rest in mid-and small-cap funds to generate higher returns over time.
What mistakes should investors avoid?
However, both experts cautioned against common investor mistakes such as chasing top-performing funds or over-diversifying portfolios. “Many investors end up holding 40–50 mutual funds, often with overlapping stocks. This not only reduces efficiency but also makes the portfolio difficult to manage,” Parashar said.
How many mutual funds are enough for diversification?
He recommended limiting the exposure to 5-6 mutual funds, which is sufficient to achieve diversification across categories such as large-cap, mid-cap, small-cap, value or hybrid funds, and even international exposure if needed. Flexi-cap or multi-cap funds can also serve as simple, diversified options for investors.
Should investors invest in sectoral or thematic funds?
Desai also advised retail investors to avoid excessive exposure to sectoral and thematic funds, noting that these are highly volatile and cyclical in nature. “In such funds, both entry and exit timing are crucial, and SIP strategies may not work as effectively. For most investors, sticking to diversified funds is a better approach,” he said.
What should investors do during market volatility?
Regarding market fluctuations, the experts emphasised that market declines should not lead to panic selling but rather should continue systematic investment plans (SIPs) because during declining markets, investors would have a chance to buy more units at lower prices, which can enhance returns over time.
Why is debt allocation important in a portfolio?
Additionally, they emphasised the necessity of keeping between 20 per cent to 30 per cent of the investment in debt or fixed income investments like fixed deposits, corporate bond funds, or even government securities, to ensure liquidity and stability within the portfolio.
What is the key to successful long-term investing?
According to the experts, discipline in investment, right asset allocation, and making decisions without being swayed by emotions are essential to attaining one’s financial objectives.
The principle of diversification helps ensure that an investor is able to take part in all cycles of the market without taking undue risks. If done correctly, it can steadily help build sustainable long-term wealth, they said.