Thinking about where to invest in this market? Set aside 30% of your portfolio for bank stocks

Indian markets at record highs, which makes it that much more difficult to decide where to invest your money. If questions like 'Will IT outperform benchmark indices or banks?' are keeping you awake, you can take solace in the fact that you are certainly not alone.

The market hit new record highs in July and the momentum continued in August as well. The rally was fierce and did not give much time to investors to take advantage of the breakout.

The good thing is that the rally is not over yet. But experts say that the real challenge would be to find sectors that can outperform benchmark indices. Going forward, market returns will be guided by corporate earnings growth and, sectors that are likely to witness a revival in earnings will be in the limelight.

"We believe that future market returns are going to be guided by corporate earnings growth rather than PE expansion. Going forward, we expect corporate earnings growth to recover meaningfully in FY19 and FY20, on the back of a recovery in earlier underperforming sectors," Sampath Reddy, CIO, Bajaj Allianz Life, told Moneycontrol.

"The sectors which are looking positive are IT, Private Financials and Consumption. IT has benefited from the rupee depreciation, consumption is showing a rebound with a pick-up in volume growth. Private financials likely to benefit from an uptick in credit growth," he said.

Allocation of funds in a portfolio on the basis of sectors will largely depend on the individual investor's risk profile and investment horizon. It would vary from person to person, but of the total allocation in an equity portfolio, investors can consider look at investing the maximum in bank stocks, followed by insurance stocks, AMCs, FMCG companies, pharma companies, and entertainment companies.

"Markets have moved up on the back of a recovery in corporate earnings. Consumer sector has seen the pick-up in volumes, IT has benefited from a depreciating rupee, and private financials have mostly delivered results which were in-line or better than expectations," VK Sharma, Head - PCG & Capital Market Strategy, HDFC Securities, told Moneycontrol.

The ideal portfolio mix for investors is 30 percent in banking, 10 percent in insurance, 10 percent in AMCs, 20 percent in FMCG companies, 15 percent in pharma companies, and the rest in the entertainment, internet or retail spaces, Sharma said.

The breakout in the Nifty was largely led by a handful of large-cap stocks. Stability in the rupee, fall in crude oil prices, the Modi government winning the recent no confidence motion, and corporate results, are some of the factors that led to the rally in July.

Analysts are confident of the momentum and advise investors to park some funds in bonds and the rest in equity. As much as 60 percent of your portfolio can be allocated towards equity investments if you are 30-40 years old.

"Despite some global headwinds, the breakout in Nifty and Sensex was mainly because of the large-caps which pulled the market higher. The quarterly results are cheering the markets in terms of growth expectations and hence the rally. However, there is a lot of euphoria and built-up in the markets and there seems to be a higher probability of a correction soon. But when this happens only time will tell," Jimeet Modi, CEO and Founder of Samco Securities & StockNote, told Moneycontrol.

"At a time when markets are trading at record highs, one can have 40 percent of his portfolio in bonds, 30 percent in large-caps, 15 percent in small-caps and 15 percent in mid-caps for appropriate diversification," he said.

In terms of sectors, investors can look at allocating funds for PSU bank stocks, realty stocks, pharma stocks, cement stocks, and OMCs. These are the sectors most likely to hog the limelight this year from a medium-term point of view.