How to navigate a market when both equity returns and FDs are declining

Exposure to gold and longer-duration debt, and purchasing equity funds systematically as valuations soften can help investors navigate this phase

Returns from equities have shrunk over the past six months owing to tariff-induced volatility, high valuations, and declining earnings. Fixed deposit (FD) returns have also begun to fall, as banks cut their deposit rates in response to repo rate cuts. With their two favourite asset classes facing the heat, investors need to follow a well-considered strategy to handle these challenging times.

 

Underperforming assets

 

Several asset classes have underperformed in recent months. “If we look at returns at the end of financial year 2024–25, equity gave back some of the gains from past years and underperformed both debt and gold,” says Sanjay Bembalkar, head of equity, Union Asset Management Company.

 

Midcap and smallcap equity funds have on average corrected 13.5–15.7 per cent over the past six months due to valuation concerns and weak earnings. “Within domestic equities, sectors such as real estate, cement, and oil and gas have underperformed significantly,” says Manish Goel, founder and managing director, Equentis Wealth Advisory Services. Bembalkar points out that the momentum factor has also lagged.

 

International funds, especially those linked to US equities, have been hit by the global correction.  

 

FDs' returns, too, have declined due to the Reserve Bank of India’s (RBI) cumulative rate cut of 50 basis points so far in 2025. “This has led to lower yields and real returns from FDs barely keeping pace with inflation,” says Goel.

 

Pockets of strength

 

Despite volatility, some assets have delivered. Gold exchange-traded funds have protected portfolios over the past year with a return of 28.3 per cent. “Gold has done well due to the uncertainty created by tariff wars and geopolitics,” says Bembalkar.

 

Largecap equities have become attractive due to their earnings stability and now reasonable valuations. “The Nifty 50 trades at a 12-month forward price-to-earnings (P/E) ratio of about 20 times, around 5 per cent lower than its long-term average. Earnings are expected to rise 13–14 per cent in FY 2025–26,” says Goel.

 

On the fixed-income side, medium and long-duration bonds, along with AAA-rated corporate bonds, have performed well amid softening inflation and the RBI’s accommodative stance.

 

Equity strategy

 

Union AMC’s proprietary fair value indicator entered the attractive zone in February 2025, indicating a favourable risk-reward outlook for long-term equity investors. Bembalkar believes India will regain favour once tariff risks and policy uncertainty subside.

 

Both Bembalkar and Goel recommend a bias towards large caps due to their balance sheet strength, valuation comfort, earnings visibility, and resilience during volatility. Goel favours a more domestic-centric portfolio aligned to sectors supported by government policy.

 

Exposure to small and midcap holdings, if very high, must be curtailed as they remain expensive despite recent corrections.

 

Fixed-income options

 

Even as FD rates decline, alternatives exist. “Investors may consider allocating to investment-grade corporate bonds for slightly higher yields. They can also invest in gilt funds and dynamic bond funds to benefit from possible declines in government bond yields,” says Raghvendra Nath, managing director, Ladderup Asset Managers.

 

For senior citizens, Nath recommends conservative hybrid and asset allocation funds with a high debt component. Narang suggests tax-free and taxable bonds, debt and arbitrage funds. Porwal prefers medium-duration bonds in the two–three-year range for stability and yield.

 

Gold as a portfolio stabiliser 

Gold remains a reliable hedge and safe haven asset. “A 5–10 per cent allocation to gold will add resilience to your portfolio,” says Porwal. Narang agrees, pointing to central banks’ increasing gold purchases amid a weakening dollar and rising US 10-year G-Sec yield.

 

However, Nath cautions against further allocation increases after the yellow metal’s recent surge. “Maintaining the current asset allocation would be a more prudent approach,” he says.

 

Portfolio strategy and review

 

Diversification and adherence to asset allocation remain crucial. “Diversification ensures that if some assets or products are adversely impacted by the downturn, others may be positively impacted,” says Narang.

 

Goel adds that there must be an emphasis on quality and resilience within portfolios.

 

Downturns can offer long-term wealth-building opportunities. “Add selectively to undervalued asset classes,” says Nath.

 

Avoid emotion-driven panic selling which often locks in losses and prevent participation in the recovery. Market declines provide valuable insight into one’s actual comfort with volatility. “Review your asset allocation to ensure it aligns with your risk tolerance and time horizon,” says Porwal.

 

Avoid concentration risks and maintain liquidity. Narang also recommends harvesting tax losses to offset future gains.

 

Exiting the market during downturns in the hope of re-entering at the bottom should be avoided. “Even professional investors rarely succeed at this consistently. And missing the days of recovery can significantly impact long-term returns,” says Porwal.

 

How to deploy money 

Investors should continue their systematic investment plans (SIPs). “Market corrections provide an opportunity to average down costs, which can enhance long-term returns,” says Goel.

 

Amid heightened volatility, lump sum investments should be staggered. “Investors should adhere to the SIP route, with the lump sum amount spread over three to six months while investing in equities,” says Bembalkar.

 

Parking funds in liquid or ultra short-term debt funds and deploying via systematic transfer plans can help average entry cost. A cash buffer may be useful to deploy a higher amount if the market falls over 20 per cent.