Indian equity markets have been among the world’s best performers for several years, and investors have benefited from this sustained bull run.
However, those who stuck to a disciplined asset-allocation strategy and rebalanced their portfolios periodically have generated superior long-term returns compared with investors who relied mainly on stock selection or market timing.
Asset allocation is especially critical for Indian investors given high market volatility, concentrated equity risks, and the availability of multiple asset classes such as debt and gold or silver.
A well-structured allocation framework delivers better risk-adjusted returns than stock picking alone. Goal-based asset allocation works best, and consistency is the real edge—it reduces behavioural biases and helps investors ride through market volatility.
Behavioural traps
Investors who focus on timing the market rather than maintaining a stable allocation often amplify behavioural biases precisely when the stakes are highest. In falling markets, fear of losses pushes investors to sell low and delay re-entry until most of the recovery is already behind them.
Recency bias leads investors to select assets based on the last six to twelve months of performance, resulting in over-allocation at market peaks and under-allocation after sharp corrections. Overconfidence compounds the problem, as a few successful calls are mistaken for skill, encouraging larger and riskier timing bets that eventually backfire.
A consistent allocation, by contrast, turns investing from a series of stressful, one-off decisions into a repeatable habit. Rules and automation reduce emotional load, ensuring decisions are not driven by daily news flow or market noise. The biggest advantage of consistency is rupee-cost averaging—more units are bought when prices are low and fewer when prices are high, naturally countering the instinct to do the opposite.
What studies show
Studies on long-horizon portfolios consistently find that asset-allocation policy explains the bulk of return variability. Market timing and security selection contribute far less and often reduce realised returns once costs, taxes and behavioural mistakes are accounted for.
Staying invested through market cycles allows compounding to do its job. Missing just a few strong market days can meaningfully reduce long-term returns. Systematic plans such as SIPs smooth the perception of volatility, making investors less likely to panic during crashes or get carried away during euphoric rallies. Over long holding periods, short-term volatility becomes irrelevant, helping investors maximise returns.
In practice, building a clear allocation policy, automating contributions, and using rule-based rebalancing harness investor psychology instead of fighting it—one reason consistency almost always beats timing over real investor lifetimes.
Power of compounding
Consistency in portfolio allocation improves long-term outcomes by harnessing compounding, minimizing behavioural errors, and systematically capturing market risk premia through SIPs and rebalancing. Staying invested over long horizons allows returns to compound exponentially, far outpacing the linear outcomes of sporadic timing attempts.
Equity returns tend to cluster in short bursts. Missing even a few top-performing days can significantly slash overall returns, reinforcing the importance of remaining invested.
Rebalancing edge
Systematic investing through SIPs buys more units during market dips and fewer at peaks, lowering the average cost per unit regardless of entry timing. Studies across Indian equity cycles show that SIPs started at market highs or lows deliver nearly identical CAGRs (compound annual growth rates) over 20-plus years, underlining the irrelevance of timing for consistent flows.
Regular portfolio rebalancing further boosts outcomes in volatile, multi-asset portfolios. It involves selling relatively overpriced assets to buy underpriced ones, locking in gains and restoring risk levels. In bull markets, rebalancing typically means trimming equities and adding debt or gold; in bear markets, it works in reverse.
Annual rebalancing tends to offer the best balance, as more frequent adjustments can raise transaction costs and tax leakage without proportionate benefits.
Ankur Punj is managing director and business head, Equirus Wealth.
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