A diversified portfolio is your best bet even as US tariff cut lifts equity outlook

Asset allocation the best way to build your portfolio

• US tariff cuts on Indian exports boost investor sentiment for equities
• Experts advise against portfolio changes based on short-term market news
• Align diversification and asset allocation with risk profile and long-term goals.

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The US decision to cut tariffs on Indian goods unleashed a way of euphoria on February 3, with markets zooming nearly 3 percent.

Couple with these gains and a brighter earnings outlook, investors might be tempted to widen equity exposure in their portfolios. But should they?

While the trade deal announcement is encouraging, portfolio decisions should not be driven by short-term developments. Instead, it is important to stick to diversification and asset allocation principles that are aligned with an investor’s risk profile and long-term goals.

“Diversification through proper asset allocation, aligned to one’s risk profile, is the only way investors can navigate volatile markets,” said Lt Col Rochak Bakshi (retired), CFP, of TRUNOR Enterprises Pvt Ltd.

Investors who have stayed invested through recent market gains may already be overweight on Indian equities. “In such cases, there is no need to further fine-tune portfolios just because sentiment has turned positive,” he said.

The tariff-driven rally may tempt retail investors to rebalance portfolios in favour of equities but Bakshi urged caution.

“One needs to first define the quantum of risk they are comfortable with and then decide the percentage of equity in the portfolio. You don’t do asset allocation by speculating which asset class will perform next,” he said.

Yash Sedani, assistant vice president-investment strategy at 1 Finance, said portfolio rebalancing should never be a reaction to short-term outperformance. “It should be driven by the risk profile of each asset, the investor’s risk appetite, life stage and financial goals,” he said.

Even after a favourable tariff announcement, broader geopolitical and macro risks remain elevated. “This does not make equities risk-free. The inherent risk of equity continues to be structurally higher than that of debt and real assets,” he said.

How to rebalance your portfolio?

Asset allocation is the way you spread your investments across different asset classes such as equities, fixed income, real estate, gold and others. Think of it as placing your money in multiple baskets to balance risk while working towards your financial goals.

Once you build a portfolio based on your risk profile, each asset class has a defined role. However, market movements can disturb this balance. A strong rally in equities can increase their share in your portfolio beyond what you originally planned. Similarly, a fall in interest rates or gold prices can reduce the allocation to debt or gold.

That’s where maintaining asset allocation becomes crucial. When the portfolio drifts meaningfully from its intended mix, rebalancing is needed. The ideal allocation depends on your risk appetite — an aggressive investor may allocate around 70 percent to equities, while a conservative investor may limit equity exposure to about 30 percent.

Rebalancing should not be driven by short-term market noise. Instead, it should be an exercise triggered by significant deviations from your target allocation. Periodic portfolio reviews help ensure your investments remain aligned with your risk profile and long-term objectives.