Asset allocation in 2025: Optimise and diversify your portfolio to thrive in uncertain times

There is no single asset allocation plan that is best for all investors.

“Don’t place your eggs all in one basket” – This ancient wisdom beautifully describes the exact premise behind asset allocation.

In the same breath, it can also be stated that investing is not only about money; it is the necessary equilibrium between risk and reward for maintaining monetary good fortune. In India, where markets do not operate within a predictable framework, asset allocation is an indispensable element for any investor. The potential for wealth creation is immense, with the Indian economy predicted to grow by 6.5 percent in 2025. But, with inflation, changing interest rates, and global red flags, a sound investment plan is a must.

A savvy investor realises that following higher returns blindly can be dangerous while turning cautious means forgoing growth. This is where asset allocation plays a role, as it creates a balanced portfolio that is aligned with an individual’s financial goals and risk appetite.

The optimisation mindset

Challenging traditional investment thinking, savvy investors know that as they do not need the top yield at the best risk-return ratio, it is all about getting the right mix of assets. This means:

Diversifying between asset classes: A well-diversified portfolio spreads the risk between equities, debt instruments, real estate, gold and alternative investments.

Defensive versus offensive: Debt instruments are usually considered safe by investors, whereas investors seeking growth invest in ownership assets like stocks and real estate.

Focus on long-term wealth creation: Investors should focus on portfolio optimisation that fuels sustainable long-term wealth creation rather than short-term market chasing.

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Key asset classes in 2025

Equities

Strong corporate earnings, coupled with digital transformation, keep the Indian stock market as the number one investment choice. In the last 10 years, the Nifty 50 has returned a CAGR (compounded annual growth rate) of around 12.5 percent. However, global uncertainties like the US Fed rate increases and oil price volatility remain risks. A well-diversified equity portfolio comprising large-cap (50 percent), mid-cap (30 percent), and small-cap (20 percent) can enable investors to manage volatility.

Fixed income

For conservative investors, bonds and fixed deposits continue to be significant. In 2025, government securities, corporate bonds, and fixed-income mutual funds provide stability amid ever-changing interest rates; The current yield for 10-year Indian government retirement bonds stands at around 6.72 percent while corporate bonds offer returns in the range of 6.5 percent-9 percent, depending on credit ratings.

Gold and commodities

Gold is still perceived as a safe-haven asset, rising more than 15 percent in 2023, while silver has increased 20 percent YoY. On the other hand, investing in crude oil continues to be shaky amid supply chain disruption across the globe.

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Real estate

The real estate industry is booming, especially commercial and warehousing. In terms of returns, the major REITs (Real Estate Investment Trusts) in India, such as Embassy REIT, Mindspace REIT, Brookfield India REIT, and Nexus Select Trust REIT, have provided varying returns ranging from 6 percent to 39 percent since their inception.

Alternative investments

The Indian alternative investment sector, which includes Portfolio Management Services (PMS) and Alternative Investment Funds (AIF), is poised to surpass the Rs 100 lakh crore threshold by 2030 as it embarks on a new phase of growth. Private equity, hedge funds, and cryptocurrencies are on the rise, with India’s alternative investment market expected to grow at a CAGR of 33 percent.  Yet there are some regulatory hurdles that must be factored into the equation.

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Determining the right asset allocation

There is no single asset allocation plan that is best for all investors. The right asset mix is different for everyone, depending on your circumstances and what you are trying to achieve. Asset allocation decisions are influenced by several factors:

Investment horizon – Longer investment periods allow for higher risk-taking. Young investors can allocate more towards equities, while retirees may prefer debt and fixed-income securities.

Financial condition – Investors with stable incomes and emergency funds can afford to take on more risk compared to those with uncertain cash flows.

Income level – Higher income levels allow for greater exposure to high-risk, high-reward investments.

Needs and aspirations – Whether an investor is saving for a house, children’s education, or retirement, their asset allocation strategy must align with their financial goals.

Responsibilities – Investors with dependents and financial commitments must consider safer investments to ensure stability.

Emerging trends in asset allocation for 2025

Rise of passive investing – Index funds and ETFs are gaining popularity, allowing investors to diversify at lower costs.

Alternative investments – More investors are exploring REITs, commodities, and international equities to diversify their portfolios.

Technology and AI-driven investing – Robo-advisors and algorithm-driven strategies are helping investors make data-driven asset allocation decisions.

ESG investing – ESG factors are influencing investment choices, with more funds being allocated to sustainable assets.

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Conclusion

Asset allocation in India in 2025 requires a well-thought-out approach that balances risk and return. While there is no one-size-fits-all strategy, investors must consider their financial situation, goals, and risk appetite when making investment decisions. By focusing on optimisation rather than maximisation and maintaining a diversified portfolio, investors can achieve long-term financial stability and growth. The key to success lies in adaptability, informed decision-making, and continuous monitoring of market trends.

The writer is a Certified Financial Planner and Founder, True North Finance, a financial and investment planning firm based in Pune.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.