‘If people start practising asset allocation, they will view volatility as opportunity’: ICICI Prudential AMC Executive Director, CIO

Asset allocation is the process of dividing investments among assets such as equities, bonds, cash, and sometimes gold or property. The purpose is to avoid depending on one source of returns. Equity-only investing places nearly all the portfolio’s outcome on company profits and share prices. That can produce stronger long-term growth, but it can also bring sharper losses.

For example, an investor might hold equities for growth, bonds for steadier income, and cash for near-term needs. If share prices fall, the bond or cash portion may reduce the portfolio’s overall decline. The exact mix depends on time horizon, goals, and willingness to accept risk.

The article highlights why this matters now. Investors face geopolitical risks, volatile oil, interest-rate uncertainty, and an unclear long-term impact from artificial intelligence. Asset allocation cannot remove losses, but it can reduce concentration and help investors avoid reacting emotionally to every market swing.

The Sensex stayed near 73,000 for roughly three years despite heavy equity-mutual-fund inflows because new buying was absorbed by substantial selling. Sankaran Naren also noted that markets had been overvalued three years earlier. That limited the chance of easy gains and made supply from existing shareholders especially important.

After March 2023, three groups sold. Indian promoters launched repeated IPOs. Private-equity firms sold investments made before 2023. Multinational companies listed Indian businesses because Indian valuations were higher than in their home countries. Mutual-fund money therefore often paid these sellers rather than creating broad upward pressure.

Other forces also held markets back. Investors moved toward countries benefiting more strongly from artificial-intelligence growth, including the US, South Korea, Taiwan, and Japan. Geopolitical tensions, the war in Ukraine and the Gulf, and record-high crude prices added pressure. The article therefore links inflows with ownership transfer, not necessarily index returns.

FCNR refers to Foreign Currency Non-Resident deposits. They allow eligible non-resident Indians to place foreign-currency deposits with Indian banks. For the economy, the important point is that such inflows provide foreign currency when external pressures are high. They can support confidence and help meet near-term foreign-exchange needs.

The article states that the Reserve Bank of India recognised the importance of securing foreign-exchange insurance and floated an FCNR scheme. It collected $127 billion in deposits. Naren said this amount took care of all near-term foreign-exchange issues, in his assessment.

That support does not remove every economic risk. The interview still identifies war-related uncertainty and the future impact of artificial intelligence as continuing concerns. It also discusses a depreciating rupee and volatile oil prices. The FCNR figure therefore represents a near-term buffer, not a guarantee that future currency or market pressures will disappear.

Balanced advantage funds, also called dynamic asset-allocation funds, can vary their allocation between equities and debt or other permitted assets. Managers may raise equity exposure when valuations look attractive and reduce it when risks appear higher. Balanced hybrid funds combine equity and debt in a relatively stable range, normally keeping 40% to 60% in each. Flexi-cap funds invest at least 65% in equities and can move freely among large-, mid-, and small-cap companies.

For example, a balanced advantage fund might reduce shares and add debt during a richly valued market. A balanced hybrid fund generally maintains its broader mix. A flexi-cap fund remains equity-focused but can shift between company sizes.

These category definitions are established mutual-fund knowledge; the supplied article does not explain them. They differ mainly in flexibility and risk: flexi-cap funds are more equity-sensitive, while the other two include a more explicit debt component.

Holding several asset classes can turn volatility into an opportunity because different investments do not always move together. When equities fall, bonds, cash, or another asset may hold up better. Investors can then rebalance by moving some money from relatively stronger assets into cheaper equities, rather than selling everything in fear.

For example, suppose shares drop sharply while a bond allocation remains comparatively stable. An investor with a planned mix can sell a portion of bonds and buy shares at lower prices. An equity-only investor has fewer sources of liquidity and may feel pressured to sell after prices have already fallen. Diversification does not guarantee profits or prevent losses.

This approach is relevant to the article’s setting. Investors face war, oil-price shocks, interest-rate changes, weak monsoons, El Niño risks, and uncertainty about artificial intelligence. A suitable asset mix can make those shocks easier to manage, but it must match each investor’s goals and risk capacity.

If geopolitical tensions ease and crude oil prices fall sharply, several pressure points could improve together. Banks could benefit because inflation and rupee depreciation have hurt the sector. Oil-marketing companies could gain because they have borne the impact of higher oil prices. Airlines could also benefit from lower fuel-related costs. These are the sector effects identified in the interview.

The broader mechanism runs through inflation and monetary policy. Cheaper oil can reduce costs across the economy. If inflation pressure eases, the Reserve Bank of India may have less need to continue raising interest rates. Lower rates can make borrowing conditions less restrictive and support economic activity, including credit demand.

Naren stressed that a good fall in oil “lubricates all parts of the economy,” rather than helping only selected industries. However, this outcome is conditional. The interview discusses what could happen if the war ends; it does not present that result as certain.

Equity represents an ownership claim in a company. Equity investors may benefit when the business grows and the market values its future profits more highly. They also bear the risk that profits disappoint, conditions worsen, or investors become less willing to pay for the shares. Unlike a bank deposit’s stated interest or a bond’s contractual payments, equity returns are not fixed.

For example, a company facing stronger competition, higher costs, or weaker demand may see its share price fall quickly. A company reporting better growth may see the price rise just as quickly. Expectations change before actual profits do, which adds to daily price movement. Bonds and deposits can also carry risks, but their cash flows are usually more predictable.

The article’s discussion shows why equity risk matters. Markets faced war, oil-price volatility, rupee weakness, interest-rate uncertainty, and unclear AI effects. Equity may offer growth, but investors need to recognise that it is not riskless and should consider diversification.