Summary of this article
Diversification reduces dependence on predicting market winners
Equity, debt and gold respond differently to market conditions
Multi-asset strategies can help manage portfolio volatility
By Jitendra Sriram, Senior fund Manager Equity. Baroda BNP Paribas Asset Management Company
Anyone who has experienced a tropical monsoon knows that clear skies in the morning are no guarantee of what the afternoon will bring. Carrying an umbrella is therefore less about predicting rain and more about being prepared for changing conditions.
Investing is not very different. Markets move through cycles, and leadership across asset classes keeps changing. Equities may lead during periods of strong economic growth and improving earnings, while gold may find favour during periods of uncertainty. Debt can benefit from a different set of economic and interest-rate conditions. Even within equities, leadership can shift between large, mid and small-cap companies and across sectors.
The challenge for investors is that these turning points are usually easier to identify in hindsight than in advance.
The temptation to follow yesterday's winner
One of the most common mistakes in investing is to assume that what has worked recently will continue to work.
When an asset class delivers strong returns, investor interest tends to follow. This is understandable. Recent performance is visible and potentially appealing, while the future is uncertain. But buying an asset primarily because it has performed well recently can result in investors entering after a significant part of the rally that has already taken place.
Learnings from behavioural finance
Behavioural biases can reinforce this tendency. Recency bias encourages us to give disproportionate importance to recent events. Performance chasing can lead investors towards the previous year's best-performing asset or category. Familiarity bias, meanwhile, may result in excessive exposure to sectors or investments that investors know and understand well.
The problem with each of these behaviours is similar: portfolio performance begins to depend on our ability to correctly anticipate what happens next, which in turn is coloured by recency and familiarity biases.
That is a difficult strategy to sustain.
Diversification reduces the need to predict
A more practical approach is to learn from the past decades of research that suggests that no single asset class is likely to remain the best performer across every market environment; and it is difficult to predict the next best performing asset class.
This is where asset allocation becomes important.
A multi-asset strategy spreads investments across asset classes such as equity, debt and gold, thereby diversifying the sources of potential performance rather than relying predominantly on a single source for returns. Each of these assets respond differentially to changes in economic growth, inflation, interest rates, liquidity, flows, geopolitics and investor sentiment. When combined in an analytical manner and manged by professional managers, these different return drivers can potentially create a more balanced and potentially rewarding investment experience across market cycles.
The objective of diversification, thus, is to have a mix of assets that have a low or negative correlation with each other so that the overall volatility of the investment is dampened, allowing the investor to earn a better risk adjusted return.
What recent numbers tell us
Recent market performance provides an interesting illustration.
For the one-year period ended August 31, 2026, the Nifty 50 TRI returned -0.35 per cent. Over three years, its annualised return was approximately 9 per cent.
Over the same periods, an illustrative blended benchmark comprising 65 per cent Nifty 500 TRI, 20 per cent Nifty Composite Debt Index and 15 per cent INR price of gold delivered returns of 11.33 per cent and 15.15 per cent, respectively.
While the comparison is illustrative rather than predictive, it shows that diversification across equity, debt and gold benefited from different asset classes contributing at different times. There will equally be periods—particularly during strong equity rallies—when a diversified portfolio may trail an equity-only index.
That is an important point. The case for multi-asset investing should not rest on whether it beats equities over a particular one-, three- or five-year period. Its relevance lies in creating a portfolio whose outcome is not dependent on one asset class consistently remaining in favour.
Category-level data also provides useful context. According to Value Research, hybrid multi-asset allocation funds delivered average returns of 7.42 per cent, 14.03 per cent, 11.78 per cent, and 11.21 per cent over one, three, five and ten years, respectively, as of August 31, 2026.
This shows that multi-asset allocation funds can play a meaningful role as a core allocation to a lay investor's portfolio, provided they have a medium- to long-range investment outlook.
Asset allocation is also about investor behaviour
There is another aspect of diversification that is sometimes overlooked.
A portfolio can be financially sound on paper but still fail an investor if its volatility causes them to abandon the investment strategy at the wrong time.
Sharp movements in a concentrated portfolio can encourage emotional decisions—exiting after a fall, entering after a rally or repeatedly moving money towards whichever asset that has recently performed best.
A diversified portfolio cannot eliminate volatility but by dampening it reduces the chance of an emotional reaction that hurts long term investment performance. That behavioural benefit can be particularly important in keeping investors on track to meet their long-term goals.
Let the allocation process work
Deciding how much to allocate to equity, debt, gold or other permitted assets is itself an investment decision.
An actively managed multi-asset fund places this responsibility with the portfolio manager. Depending on the fund's mandate and investment philosophy, allocations may be guided by factors such as valuations, interest rates, earnings expectations, liquidity, inflation and the relative attractiveness of different asset classes.
This does not mean that every allocation decision will be right. Rather, it provides investors with a structured approach to diversification instead of requiring them to repeatedly decide which asset to buy, sell or avoid.
Conclusion
Markets will continue to move through cycles. Leadership will continue to change, often when investors least expect it. A sensible and diversified asset-allocation strategy acknowledges that uncertainty instead of attempting to eliminate it.
Multi-asset investing is ultimately less about identifying tomorrow's winner and more about ensuring that a portfolio does not depend too heavily on today's winner.
And much like carrying an umbrella on an uncertain day, diversification is not a forecast. It is preparation.
Disclaimer:
The material contained herein has been obtained from publicly available information, internally developed data, and other sources believed to be reliable, but Baroda BNP Paribas Asset Management India Private Limited (BBNPP) makes no representation that it is accurate or complete. BBNPP has no obligation to tell the recipient when opinions or information given herein change. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This information is meant for general reading purposes only and is not meant to serve as a professional guide for the readers. Except for the historical information contained herein, statements in this publication, which contain words or phrases such as ‘will’, ‘would’, etc., and similar expressions or variations of such expressions may constitute forward-looking statements. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. BBNPP undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof. Words like believe/belief are independent perceptions of the Fund Manager and do not construe as opinion or advice. This information is not intended to be an offer to see or a solicitation for the purchase or sale of any financial product or instrument. The investment strategy stated above is for illustration purposes only and may or may not be suitable for all investors. The information should not be construed as investment advice and investors are requested to consult their investment advisor and arrive at an informed decision before making any investments. The Trustee, AMC, Mutual Fund, their directors, officers, or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.
The sector(s)/stock(s) mentioned in this document do not constitute any recommendation of the same, and Baroda BNP Paribas Mutual Fund may or may not have any future position in these sector(s)/stock(s).
The views and investment tips expressed by experts are their own and are meant for informational purposes only and should not be construed as investment advice. Investors should check with their financial advisors before taking any investment decisions. Past performance, including such scenarios, is not an indication of future performance
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(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
