The last few weeks have been dominated by the global impact of Donald Trump’s victory in the U.S. elections and the anticipation of his inauguration on January 20. His policy announcements so far highlight a focus on tax reforms, deregulation, infrastructure spending, and the imposition of higher tariffs to protect U.S. industries. These policies are expected to boost U.S. growth in the near term, with the USD index becoming much stronger and renewed confidence in the “U.S. exceptionalism” narrative. However, the tax cuts and higher tariffs also risk widening the fiscal deficit and increasing inflationary pressures. In response, bond vigilantes have driven U.S. Treasury yields higher.
Such a scenario is not favourable for emerging markets, which are already under pressure from reduced capital inflows. Countries like Turkey, South Africa, and Brazil are grappling with weak currencies and fiscal challenges, making them particularly vulnerable to rising global interest rates and dollar strength. India, too, has not been immune, with the markets witnessing a correction of nearly 10%, driven by a mix of factors, including subdued corporate earnings, foreign institutional investor (FII) outflows, and concerns over global economic uncertainties. Additionally, rising crude oil prices and moderating export growth have added to the near-term headwinds. Europe is also struggling with sluggish growth and structural challenges, and China’s recovery appears protracted due to its focus on internal rebalancing.
However, amidst these global trends, India still continues to stand out as a bright spot. The country’s economic growth remains robust, underpinned by structural reforms, resilient domestic demand, and supportive monetary policy by the RBI. The central bank’s focus on maintaining a growth-oriented stance, combined with the government’s expected announcement of expanded fiscal stimulus, positions India favourably for sustained growth. GDP growth for FY25 is expected to be at 6.4%, while in FY26, it is expected to be slightly higher at 6.7%. Overall, its structural growth story, reform-driven policies, and supportive macroeconomic environment position India as a key diversification option for global investors.
Overall, 2025 is expected to be a positive year but with divergent returns from various parts of the economy. India in 2024 delivered good returns with the BSE 500 returning 14%, well-managed portfolios though generated around 20% with appropriate asset allocation and smart scheme selection. Economic growth slowed down to 5.4% in Q2FY25, and it is taking some time to recover to its expected trajectory. Therefore, it is possible that 2025, while expected to be positive, might fare less well than the previous year. However, by adopting a disciplined, diversified investment approach including appropriate asset allocation and careful scheme selection, investors can navigate 2025 with confidence , capitalize on the opportunities presented by India’s sustained growth and generate good alpha returns( more than the index), similar to 2024.
For medium-term goals (anything above 3 years), allocation to equities should remain on the higher side. Fresh money could be invested in tranches, utilizing the STP route (systematic transfer plan). Equity mutual fund schemes remain the preferred way to express interest in stocks because of the broad-based market and rapid rotation across sectors and caps. Consequently, selected schemes should belong to categories that allow easy movement from one cap to another. Examples include Large & Midcap, Multicap, Flexicap, and Focus categories. Fund managers who quickly identify the right sectors should be selected. One helpful pointer is the percentage of schemes managed by them that are in the top quartile during the last 2 years.
As always, with global and local uncertainty, some part of the portfolio should always be invested in high-quality short-term debt funds to take care of liquidity and any contingencies. Similarly, for short-term goals, equities, because of their volatile nature, should not be deployed. Equity savings schemes, balanced advantage schemes, or multi-asset funds may be utilized for goals with a time horizon of 2–3 years. An additional advantage of these schemes over traditional bank deposits is the much lower equity taxation that these schemes enjoy. Portfolio construction should be sequential in the order of liquidity, safety, and yield-enhancing components.
