Entering the new Samvat: How to position your portfolio for long-term wealth creation

ET CONTRIBUTORS

Where returns come from

Market returns are driven by two broad factors: earnings growth and changes in the valuation investors assign to those earnings. While valuations can influence returns over shorter periods, earnings growth tends to be the more durable driver of wealth creation.

Between FY1993 and FY2026, Sensex earnings compounded at 12%, while the index delivered returns of 11%. This highlights an important lesson for investors: over long periods, market returns broadly reflect the growth of underlying businesses.

The last year serves as a reminder that markets and fundamentals do not always move together. Sentiment can weaken even when businesses continue to grow. Such phases can be uncomfortable, but they are a normal part of investing.

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Looking ahead, India's macroeconomic backdrop remains broadly supportive. Improving nominal GDP growth, policy continuity, progress in trade agreements and resilient domestic participation generally provide a favourable environment for corporate earnings. While these factors may not eliminate volatility, they tend to support long-term earnings growth that could ultimately drive equity returns.

Asset allocation comes first

The most important investment decision is often not which fund to buy, but how much to allocate to each asset class.

History shows that leadership among equities, gold and fixed-income investments changes over time. No investor can consistently predict which asset class will outperform next, making diversification across asset classes an essential part of portfolio construction.

The same principle applies within equities. Different sectors, themes and market-cap segments tend to outperform at different stages of the market cycle. A portfolio built around a single theme, market-cap segment or recent winner risks being on the wrong side of future leadership changes.

The right asset allocation should be determined by an investor's financial goals, investment horizon and risk tolerance, rather than by what has performed best recently.

Look beyond headline diversification

Diversification should not stop at the asset-class level. Investors should periodically review the underlying stock, sector and thematic exposures across their portfolios.

In periods when certain sectors or themes outperform, many funds naturally become more exposed to those areas. As a result, investors may unknowingly accumulate concentrated positions across multiple schemes. What appears diversified at first glance may, in reality, have significant exposure to the same sectors, businesses or investment themes.

Periodic portfolio reviews can help identify such unintended concentrations and ensure that the overall portfolio remains aligned with long-term objectives. It is often useful to evaluate exposures at the portfolio level rather than assessing each investment in isolation.

Behaviour is often considered as the biggest return driver

Markets have remained volatile over the past few years, and such periods often test investor discipline. The temptation to react to short-term market developments can be strong, particularly when headlines turn negative. However, some of the most significant investing mistakes occur when investors abandon well-considered long-term plans in response to temporary market conditions.

Investors who continue their SIPs during volatile periods allow rupee-cost averaging to work as intended and avoid the challenge of trying to time market movements. Encouragingly, domestic investor participation has remained resilient despite periods of uncertainty, reinforcing the importance of disciplined investing over emotional decision-making.

Keep realistic expectations

While the long-term outlook remains constructive, investors should recognise that risks continue to exist. Escalation of tensions in the Middle East could keep pressure on oil prices and inflation. Higher global bond yields and other external developments can also influence market sentiment and valuations in the short term.

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The appropriate response, however, is not constant portfolio reshuffling or attempts to predict every market move. Instead, investors should focus on building portfolios that can withstand a range of outcomes.

The most successful wealth-creation journeys are rarely built on prediction. They are built on sound asset allocation, diversification, periodic portfolio reviews, disciplined investing and patience. Investors entering Vikram Samvat 2083 with these principles in place are likely to be in a position to navigate uncertainty and participate in long-term wealth creation.

(Harshad Patwardhan is a Chief Investment Officer at Union AMC)