Last Updated on Jun 23, 2025 by Harshit Singh
Building long-term wealth in India’s dynamic market requires more than just picking stocks or timing trends. Thus, investors typically aim to manage risk and returns through a disciplined approach that includes asset allocation, diversification, and rebalancing.
Let’s understand these concepts.
Table of Contents
Why These Strategies Matter for Indian Investors?
The Nifty 50 has historically delivered an average annual return of 11.6% as of May 27, 2025, over the past decade (May 27, 2015 – May 27, 2025), according to market data. However, this growth is accompanied by volatility. Economic shifts, inflation, and global events can impact the financial plans of investors.
By spreading investments across asset classes (equity, debt, and commodity) and adjusting your portfolio in a timely manner, you can minimise risks while staying aligned with long-term objectives, such as buying a home, funding education, or retiring comfortably.
Understanding Asset Allocation: A Portfolio’s Foundation
Asset allocation is the process of dividing your investments among different asset classes based on your risk tolerance, time horizon, and financial goals. Different asset classes, such as equities, debt, gold, and real estate, perform or behave differently under different market conditions. The idea is that each asset class has a different risk and return profile, so the mix you choose will help to determine the risk and potential return of your portfolio.
Few Types of Allocation
There is no one-size-fits-all approach to investing, and asset allocation strategies can vary significantly. Here are two widely used approaches:
1. Strategic Asset Allocation
This is a long-term, goal-based strategy focused on creating an optimal mix of asset classes, typically equities, debt, commodities, and real estate, to maximise returns for a given level of risk. Once this mix is decided based on your risk profile, it generally stays fixed (with periodic rebalancing). On the other hand, someone nearing retirement may have a more conservative profile, with a larger portion invested in safer, income-generating assets.
2. Tactical Asset Allocation
This is a short-term, market-driven approach in which the portfolio temporarily deviates from its original strategic allocation to capitalise on market opportunities.
For instance, if equity markets are overheated, you may choose to reduce your equity exposure and park that amount in debt or gold. Once market conditions stabilise, you revert to your original strategic mix.
But can these strategies give you a definite win over the markets? No one, neither investors nor advisors, can predict future winners with certainty. That’s precisely why diversification plays such a crucial role in investing.
Diversification: Don’t Put All Eggs in One Basket
Diversification is a strategy of investing in a variety of assets so that you’re not overly exposed to any single asset class. In plain language, it means not putting all your eggs in one basket! The benefit is straightforward: if one investment performs badly, others might do better, thus reducing your overall risk.
This means that as an investor, you want a mix of investments so that at least one part of your portfolio is doing well under various conditions.
Diversification works on multiple levels:
Across Asset Classes: This refers to spreading investments across various categories, including equities, debt, commodities, and real estate, to name some. Different assets often respond differently to economic conditions. Usually, when stock markets decline, fixed-income instruments like bonds may hold steady.
Within an Asset Class: Even inside one category, you can diversify further. If you invest in stocks, avoid investing in just one company or one sector. For example, instead of buying only shares of a single bank, you could buy stocks across different industries and sectors or invest through diversified equity-oriented mutual funds. This way, if one company or sector faces trouble, your entire portfolio isn’t hit hard.
How Does Diversification Work in Mutual Funds?
Diversification is at the heart of why mutual funds are so popular, especially for new investors.
Diversification in mutual funds works by spreading your investment across a wide range of securities, so that the risk of any single investment performing poorly is minimised. Instead of investing all your money in one or two companies, a mutual fund pools money from many investors and allocates it across various assets, often spanning multiple sectors, industries, and even geographies.
Ways to Diversify Your Portfolio
Investors can diversify their portfolios across various assets in several ways, depending on their risk appetite, investment goals, and market outlook. Here are some strategies:
Across Sectors
One can spread investments across industries like banking, FMCG, healthcare, IT, and renewables. This reduces the risk of sector-specific downturns affecting the entire portfolio.
By Market Capitalisation
Investors may want to allocate funds across large-cap, mid-cap, and small-cap stocks to balance safety and growth potential.
Geographic Diversification
During times of uncertainty, one can look to invest in international or global mutual funds to gain exposure to foreign markets and reduce dependence on the Indian economy alone.
Alternative Assets
Other instruments like ETFs, REITs (Real Estate Investment Trusts), can provide diversification beyond traditional stocks and bonds. These may act as hedges during market volatility.
The primary goal of diversification is risk reduction in the long term. This doesn’t guarantee against losses, but it can make the ride a lot smoother than betting on a single asset.
The Importance of Rebalancing Your Portfolio
Now, after you decide on an asset allocation and invest your money accordingly, rebalancing your portfolio comes next.
Rebalancing is the process of periodically adjusting your portfolio back to your intended asset allocation mix. Why is this necessary? Because over time, different assets will grow at different rates, and your portfolio can drift away from your original plan if not rebalanced in a timely manner.
There are a couple of ways to approach rebalancing:
Time-based Rebalancing: This involves reviewing your portfolio at regular intervals, such as once a year or every six months, regardless of market movements.
Threshold-based Rebalancing: In this approach, you set a tolerance band. For example, you might say, “I will rebalance whenever my equity allocation deviates by more than 10% from the plan.” This way, if a market rally or crash skews your allocation beyond that band, you’ll rebalance at that point rather than waiting for a set date.
Step-by-Step Rebalancing*
Review Your Portfolio: Compare current allocations to your target (e.g., 60% equity, 30% debt, 10% gold).
Calculate Deviations: If equity hits 66%, sell 6% to reinvest in underweight assets like debt.
Mind Tax Implications: Currently, the rate for other long-term capital gains (LTCG) on all assets has been rationalised to 12.5% without indexation. The exemption limit has also increased to Rs. 1.25 lakh per year.
Use SIPs: This means that instead of selling and buying, you can shift your future SIP contributions to low-performing assets within the intended allocation. How? Basically, at times, the allocation drifts away due to the under- or overperformance of some assets. By shifting SIPs to low-performing assets, an investor can purchase more units of those assets at lower prices, helping to bring the portfolio back in line with the original investment plan.
Whichever method you use, rebalancing tends to work best when done relatively infrequently (e.g. annually or semi-annually, and not weekly or daily).
*Note: The percentages used above are purely for illustration and should not be considered as investment advice. Actual allocations can vary from person to person.
To Wrap Up
Investing isn’t about chasing hot tips or timing the market; it’s more about having a plan, sticking to it, and making wise, informed choices. Remember, good investing doesn’t need to be flashy. As the saying goes, “Good investing should be boring.”
Disclaimers
An Investor education and awareness initiative by Zerodha Mutual Fund.
Know Your Customer: To invest in the schemes of Mutual Fund (MF), an investor needs to be compliant with the KYC (Know Your Customer) norms and the procedure is -> Fill the Common KYC (CKYC) application form by referring to the instructions given below:
Enclose self-certified copies of both proof of identity and address. For Proof of Identity, submit any one document – PAN/ passport / voter ID/ driving license/ Aadhaar / NREGA job card/ any other document notified by central government. Proof of address, submit any one document which is the same as the proof of identity, except for PAN (since this document does not specify the address). If your permanent address is different from the correspondence address, then you need to submit proof for both the addresses. Documents Attestation – By any one from the authorized officials as mentioned under instructions printed on the CKYC application form. PAN Exempt Investor Category (PEKRN) – Refers to investments (including SIPs) in MF schemes up to INR 50,000/- per investor per year per Mutual Fund. This set of investors need to submit alternate proof of identity in lieu of PAN. In Person Verification (IPV) – This is a mandatory requirement and can be done by the list of officials mentioned in the instructions printed overleaf on the CKYC application form. Please submit the completed CKYC application form along with supporting documents at any of the point of acceptance like offices of the Mutual Fund/ Registrar, etc.
Investors may also complete their KYC online through Aadhar OTP-based authentication. Visit the respective fund house website or contact their customer care to know more about the process.
Modification to existing details like address/ contact details/ name etc. in KYC records – For any modifications to be done to the existing KYC details, the process remains same as mentioned above, except that only the details to be changed needs to be mentioned on the form along with PAN/ PEKRN and submitted with the relevant proofs.
Modification to your existing details like contact details/ name/ tax status/ bank details/nomination/ FATCA etc in Fund House records – Please visit the website of the respective Fund House to understand the procedure to update the details (if published) OR reach out to the customer service team of the respective Fund House.
Dealing with registered Mutual Funds
Investors are urged to deal with registered Mutual Funds only, details of which can be verified on the SEBI website (www.sebi.gov.in) under Intermediaries/ Market Infrastructure Institutions.
Redressal of Complaints
If you have any queries, grievances or complaints pertaining to your investments, you may approach the respective Fund House through various avenues published on their website. If you are not satisfied with the responses provided by the Fund House, you may then register your complaint on SCORES (Sebi Complaints Redress System) portal provided by SEBI for which the link is -> https://scores.sebi.gov.in
Other Disclaimer: The Content of this article/document is for educational and informational purposes only and should not be construed as financial advice. Please consult your financial advisor for advice suited to your specific circumstances.
Investing in mutual funds and other financial products involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, investors should conduct their own research and seek advice from qualified financial advisors to ensure that the respective products and strategies are suitable for their specific financial situation and objectives.
The Nifty index mentioned in this article/document is owned by NSE Indices Limited. All information provided is for informational purposes only.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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