Globally, the traditional 60:40 equity-bond portfolio has long been the basis of asset allocation. However, the experience of recent years has prompted investors to consider how to build more resilient portfolios that can withstand different risk scenarios. This evolution in thinking underscores the importance of active management, careful security selection in both equities and fixed income, and exploring long-term structural themes and alternative investments to improve the risk-return profile.

Diversification as a key strategy

In India’s rapidly developing economy, diversification across asset classes has become a key strategy for wealth creation. As the country demonstrates resilience and steady growth, smart investors are increasingly looking to diversify their investments across asset classes to better manage risk and optimize returns.

By spreading their capital across different asset classes – such as stocks, real estate, fixed income and commodities – investors can mitigate the impact of market volatility and economic downturns. The reasoning is simple: different asset classes react differently to the same economic events. For example, while stocks may fall during a market downturn, bonds or commodities may remain stable or even increase in value, providing a buffer against potential losses.

The role of stocks in wealth creation

India’s stock market has emerged as a major driver of wealth creation, largely due to favorable government policies, rising consumer demand and rapid technological advancements. However, relying solely on stocks leaves investors exposed to market volatility, which is why diversification is essential.

Fixed-income securities: stability and capital preservation

Fixed income investments such as government securities and high-quality corporate bonds are essential for conservative investors who value capital preservation over high returns. In today’s economic climate of relatively stable interest rates, these instruments offer a stable income with comparatively low risk and are therefore an important part of a balanced portfolio.

Real Estate and REITs: Growth and Liquidity

Real estate continues to be a popular investment option in India, driven by increasing urbanization and rising demand for housing. In addition, real estate investment trusts (REITs) have gained significant traction in recent years, offering investors the opportunity to invest in real estate without the complexities of owning property directly. REITs offer regular income streams and liquidity, making them an attractive choice for portfolio diversification.

Commodities: A protection against inflation

Commodities such as gold and silver have long been considered safe havens, especially in times of economic uncertainty. In India, where gold has cultural significance, it remains a popular investment, particularly as a hedge against inflation. Commodity ETFs (exchange-traded funds) offer a convenient way to invest in a diversified basket of commodities, further enhancing the benefits of a balanced portfolio.

In addition, alternative investments have emerged as promising ways to build wealth. India’s booming startup ecosystem has opened up new opportunities for wealth creation through venture capital and private equity investments. While these investments carry higher risks, they offer the potential for above-average returns, especially in high-growth sectors such as technology and fintech.

In summary, investors need a broader range of assets than the traditional 60:40 portfolio of stocks and bonds to build a portfolio that suits their financial goals and risk appetite. By diversifying across asset classes, investors can better navigate the dynamic Indian market and achieve long-term wealth creation.

Dhiraj Padiyath, Head of Products and Platforms, YES Securities (India) Limited