Red Markets, Green Funds: Know The Secret Behind Winning Portfolios

Investing in mutual funds can be exciting when the markets are soaring, but what happens when the market turns volatile? Over the past few months, we have seen a sharp market correction—benchmark indices have fallen over 10%, and some mid- and small-cap stocks have lost nearly 50% of their value. Many investors, especially those new to mutual funds, see their portfolios in red for the first time.

However, some actively managed mutual funds have outperformed the broader market, cushioning investors from heavy losses. But how do they do it? More importantly, how does your financial planner, with their expert knowledge and experience, choose funds that protect your investments while offering long-term growth? Let us break it down.

Why Some Mutual Funds Outperform Even in a Market Crash

Not all mutual funds react the same way to a downturn. While some saw steep losses, a few managed to limit their decline and even outperformed when the markets rose. The key? Innovative fund management and strategic asset allocation.

1. The Power of Flexi-Cap Funds: A Balanced Approach to Market Cycles

Flexi-cap funds, which can invest across large-cap, mid-cap, and small-cap stocks, have been a saviour for many investors during this downturn. These funds allow fund managers to adjust their holdings dynamically based on market conditions.

Imagine you have a friend who runs a grocery store. When he notices that the price of tomatoes is soaring due to supply shortages, he reduces his stock of tomatoes and instead buys more potatoes, which are stable in price. Similarly, good fund managers in flexi-cap funds reduce exposure to risky, overvalued stocks and shift toward stable, high-quality companies.

Many well-managed flexi-cap funds did precisely this—before the market correction, they reduced their exposure to expensive mid- and small-cap stocks. They moved into stable large-cap companies, ensuring that investor losses were minimised.

Lesson for investors:

• If you want both stability and growth, flexi-cap funds provide the flexibility needed to navigate market ups and downs, adapting to changing conditions and protecting your investments.
• Your financial planner may suggest these funds because they can adapt to changing market conditions, unlike large-cap or small-cap funds restricted to specific segments.

2. Why Mid- and Small-Cap Stocks Can Be a Double-Edged Sword

Over the past year, mid-and small-cap stocks delivered stunning returns, attracting a flood of investors. However, when the correction hit, these same stocks tumbled quickly.

Picture a newly opened restaurant in your city that suddenly becomes the talk of the town. Everyone rushes in, leading to long waiting times and skyrocketing prices. However, a food safety inspection revealed issues, and the restaurant lost half its customers overnight. This is similar to what happens with mid-and small-cap stocks—they can rise rapidly but fall just as fast when sentiment turns negative.

Many investors heavily invested in mid- and small-cap funds saw their gains wiped out. Some fund managers, however, had already sensed that these stocks were overpriced and reduced their exposure before the crash.

Lesson for investors:

• Small- and mid-cap funds can deliver high returns but come with higher risk.
• If your financial planner suggests these funds, they are likely thinking long-term—at least 5-7 years—and expect market conditions to favour growth-oriented stocks in the future.
• However, if the market seems overheated, they might reduce exposure to small-cap funds to protect your portfolio from significant losses.

3. Large-Cap Funds: Stability in Uncertain Times

When markets become uncertain, large-cap funds—investing in well-established, financially strong companies—tend to hold up better than mid- and small-cap funds. These funds may not deliver the highest returns in a booming market but provide a solid foundation during downturns.

Anecdote: Think of large-cap funds like your grandparents’ old house. It may not have the modern design of new apartments, but during a storm, it stands firm while newer buildings suffer damage. Similarly, large-cap stocks are resilient, making your portfolio more stable when markets crash.

During the recent downturn, funds with higher allocations to large-cap stocks better-protected investors. Financial planners anticipating increased market volatility had already shifted more client funds into large-cap stocks before the correction, reducing risk.

Lesson for investors:

• Large-cap funds are a good option if you prefer stability over short-term high returns.
• If your financial planner shifts your portfolio towards large-cap funds, they prioritise wealth protection during uncertain times.
• You may not see massive short-term gains, but your portfolio remains strong and recovers faster after a downturn.

How Your Financial Planner Selects the Right Funds for You

A financial planner does not just pick funds based on past performance. Their investment strategy is based on market conditions, economic indicators, and, most importantly—your financial goals and risk tolerance.

1. Why Large-Cap, Mid-Cap, or Small-Cap?

Your financial planner decides how much of your portfolio should be in large-cap, mid-cap, or small-cap funds based on:

• Market Trends: If the market is overheated, they may reduce exposure to small-cap stocks. If it is undervalued, they may increase exposure.
• Economic Conditions: Inflation, interest rates, and global market trends influence where to invest.
• Your Risk Appetite: If you are a conservative investor, they will lean towards large-cap funds. They may allocate more to mid- and small-cap funds if you can tolerate short-term volatility.

Anecdote: Imagine going on a long road trip. A financial planner is like your navigator—they check the weather, road conditions, and fuel levels before deciding which route to take. Similarly, they analyse the market before choosing your best investment strategy.

The Value of a Certified Financial Planner (CFP): A Key Asset in Your Investment Journey

A Certified Financial Planner (CFP) understands market cycles and how they impact investments. Their experience helps them make informed decisions, ensuring that:

• Your investments align with your long-term goals (not just short-term trends).
• Your portfolio is adjusted when necessary (instead of blindly following past performance).
• You avoid emotional decisions like panic-selling during downturns.

Anecdote: Have you ever watched a seasoned driver manoeuvre through heavy traffic? They anticipate roadblocks, choose the best lane, and adjust speed accordingly. A good financial planner does the same with your investments—navigating market fluctuations to keep your financial journey on track.

Final Takeaway: Trust the Process, Stay Invested

Investing in mutual funds is not about chasing quick returns but building wealth steadily over time. The recent market correction proved that the right mutual funds, chosen with the right strategy, can protect and grow your money. Trust the process, stay invested, and your financial planner will guide you through market fluctuations.

What This Means for You

• If your financial planner moves you into large-cap funds, they prioritise stability and long-term security.
• If they suggest flexi-cap funds, they are giving your portfolio adaptability.
• If they recommend mid- or small-cap funds, they believe there is long-term growth potential but will monitor risk.
• Market conditions dictate fund selection—trust the expertise of a planner who understands these cycles.

Just like an expert navigator helps you reach your destination safely, a qualified financial planner ensures that your investments are positioned correctly—so you reach your financial goals without unnecessary detours or roadblocks.

By choosing the right funds at the right time, you can stay confident in your investments, no matter how the market moves.

Future Investment Strategies: How to Position Your Mutual Fund Portfolio for What is Next

While the strategies outlined earlier have worked well in the past and present, smart investing is about looking ahead. Financial markets move in cycles, and as an investor, your goal should be to position your portfolio to perform well in future market conditions—whether we are heading into a bull market or a bear phase.

Now, let us go a step further and discuss how to invest for the future based on what is happening in the markets today.

How to Invest in the Next Market Cycle: Bear vs. Bull Phase

Current Market Overview

• The last year has been a roller coaster for investors, with mid-and small-cap stocks rising sharply before correcting.
• Inflation, interest rates, and global economic uncertainties have kept investors cautious.
• Large-cap stocks have provided stability, while some actively managed flexi-cap funds have helped balance risk and reward.

The key question is: What comes next?

What should your portfolio look like if the market enters a bear phase?

How should you structure your investments for maximum returns if a new bull market begins?

Let us break it down.

1. Bear Market Investing: Playing Defense While Positioning for Growth

What happens in a bear market?

• Stocks decline significantly, sometimes by 20% or more, leading to fear and uncertainty.
• Investors panic-sell, driving prices lower than their actual value.
• Risky assets, like small-cap and thematic funds, underperform, while stable assets do better.

Recommended Mutual Fund Mix for a Bear Market✅

Large-Cap Funds (50-60% of portfolio)

• These provide stability and resilience during market downturns.
• Large-cap companies have strong cash flows, lower debt, and steady business models, making them safer in bad times.
• If we see rising interest rates or economic slowdowns, large-cap funds will be the best defence.

Flexi-Cap Funds (20-30%)

• A good flexi-cap fund will dynamically adjust its exposure between large, mid, and small-cap stocks based on market trends.
• This ensures that your portfolio is not entirely defensive if a rebound happens.

Debt and Liquid Funds (10-20%)

• Some of your investments should go into short-duration debt funds, offering stability and lower risk.
• This cash allocation helps you seize future opportunities when markets stabilise.

Avoid exposure to small-cap funds, thematic funds, or momentum-based strategies during a bear market, as they tend to suffer the most.

2. Bull Market Investing: Maximising GrowthGrowth with a Balanced Approach

What happens in a bull market?

• Stocks rise consistently, and investor confidence drives high liquidity into markets.
• Mid-cap and small-cap stocks perform exceptionally well, delivering the best returns.
• Investors who took higher risks early in the bull cycle benefit the most.

Recommended Mutual Fund Mix for a Bull Market

Mid-Cap and Small-Cap Funds (40-50%)

• Small- and mid-cap funds have historically outperformed large-caps in bull markets, but they need careful monitoring.
• Investing in small caps too late in a bull market can be risky, so timing is important.
• If the bull market is beginning, increasing exposure to these funds can provide superior returns.

Flexi-Cap Funds (30-40%)

• While small- and mid-cap funds offer high growth, flexi-cap funds help manage risk by adjusting allocations.
• If the market starts overheating, fund managers will shift toward safer stocks, protecting your gains.

Large-Cap Funds (10-20%)

• Large-cap funds provide stability even during a bull run.
• While they may not grow as fast as mid- and small-caps, having some exposure ensures portfolio balance.

Avoid heavy exposure to defensive sectors or debt funds during the early stages of a bull market, as they might underperform compared to equities.

What Should You Do Today?

Now that we have covered how to invest in future bear and bull phases, the next logical step is to determine the right mix for today's market.

Given the current economic uncertainty, market volatility, and inflation risks, we are at a crossroads.

Markets have corrected from their highs but are not in a deep bear phase yet.

A cautious but opportunistic approach works best right now.

Recommended Investment Mix for Today

 Large-Cap Funds (40%) → Provides a strong foundation if volatility increases.

 Flexi-Cap Funds (30%) → Ensures dynamic allocation across market conditions.

 Mid-Cap Funds (20%) → Positions for GrowthGrowth if markets recover.

 Debt or Liquid Funds (10%) → Acts as a buffer in case of further corrections.

 If markets turn bullish: Increase mid- and small-cap exposure gradually.

 If markets turn bearish, Shift more into large-cap and flexi-cap funds for stability.

Final Thoughts: Why Your Financial Planner’s Strategy Matters

A good financial planner does not just react to market conditions—they anticipate and prepare for different market cycles. Their investment approach is based on:

Deep Market KnowledgeThey analyse economic data, interest rates, global trends, and sectoral performance before making allocation decisions.

Risk ManagementThey balance growth vs. stability to ensure your wealth grows without taking excessive risks.

CFP Certification & ExperienceProfessional planners bring decades of expertise in financial markets, ensuring you get a strategy that works for the long term, not just short-term trends.

What This Means for You as an Investor

• If your planner shifts you towards large-cap and flexi-cap funds now, it is to protect your wealth in case of further volatility.
• If they gradually increase mid-cap exposure, they believe the next bull market is forming.
• If they recommend keeping some funds in cash or debt funds, they are ensuring you have liquidity to buy at better prices later.

Smart investing is about positioning—not reacting.

By trusting the expertise of a qualified financial planner, you can stay ahead of market cycles, protect your capital, and maximise your long-term gains.

The future is uncertain, but with the right investment mix, you can be prepared for whatever comes next.

India’s Investment Outlook: How to Position Your Mutual Fund Portfolio for 2025 and Beyond

India’s financial landscape is at a critical turning point, with key macroeconomic factors shaping market trends. Interest rates, elections, and the Union Budget 2025 have all set the stage for investors. How should your mutual fund portfolio be positioned based on these realities as we move forward?

Before outlining an optimised investment strategy, let us analyse India's current economic conditions and market trajectory.

Current Economic Landscape in India (2025)

1. Reserve Bank of India (RBI) Rate Cuts Are Beginning

• RBI has cut repo rates by 0.25%, signalling the start of an easing cycle.
• Lower interest rates typically lead to increased borrowing and higher liquidity in the stock market.
• Historically, rate cuts have fueled mid-cap and small-cap stock growth.

2. Elections Are Over – Policy Stability Returns

• With general elections concluded, political uncertainty is out of the way.
• Investors and businesses now have policy clarity, boosting long-term sentiment.

3. Union Budget 2025: A Pro-Growth Stance

• Higher infrastructure spending, manufacturing incentives, and tax benefits for investors have been announced.
• Sectors like banking, infrastructure, and consumption are set to benefit.
• The fiscal deficit remains under control, reducing long-term economic risks.

4. Inflation Is Under Control

• India's inflation has moderated, further reducing concerns about RBI hiking rates.
• Lower inflation increases consumer spending, which supports economic growth.

5. Global Factors Still Pose Some Risks

• While India remains resilient, global risks like geopolitical tensions and potential US Fed rate cuts need monitoring.
• Foreign institutional investor (FII) inflows into Indian markets will likely rise if global conditions improve.

Investment Strategy for India’s Future Market Cycles

Where Are We in the Market Cycle?

Given these factors, India is entering a new phase of growth, supported by lower interest rates, policy stability, and strong domestic demand.

We are not in a deep bear market, but we are not in a full-fledged bull market either.

This means a balanced, growth-focused investment strategy is ideal.

Mutual Fund Portfolio Strategy for India (2025 & Beyond)

🔹 Based on the current economic and market conditions, investors should focus on:

1. Growth-oriented funds (mid-small caps) for upside potential
2. Steady large-cap exposure for stability
3. Flexi-cap funds to dynamically adjust to market changes

Recommended Mutual Fund Mix for India (2025 & Beyond)

 Mid-Cap & Small-Cap Funds (40-50%) – Riding the Growth Wave

• Why? With rate cuts and pro-growth policies, mid and small-caps will benefit the most.
• Sectors to watch: Banking, Infrastructure, Consumption, and Manufacturing.
• Risk: Higher volatility, so invest with a 3-5 year horizon.

Who should invest?

• If you are looking for high-growth, long-term investments.
• If you can handle short-term volatility for higher long-term gains.

 Flexi-Cap Funds (30-35%) – Adaptive Investing for Uncertainty

• Why? These funds allow fund managers to shift between large, mid, and small caps.
• Best suited for: Investors who want moderate risk but strong returns.

Who should invest?

• If you want automatic allocation adjustments based on market conditions.
• If you want a balanced mix of stability and growth growth.

 Large-Cap Funds (15-20%) – Stability & Core Growth

• Why? Large-cap stocks offer safety, steady returns, and global investor confidence.
• Good for: Investors who want a low-risk, steady compounder in their portfolio.

Who should invest?

• If you are risk-averse and looking for stability.
• If you are a long-term investor wanting steady compounding.

 Sectoral & Thematic Funds (Optional 10%) – Selective Opportunities

• Which sectors? Infrastructure, Banking, Manufacturing, Digital India, and Consumption.
• Why? India's pro-growth policies favour these sectors.
• Risk: Sectoral funds are more volatile. Keep exposure limited.

Who should invest?

• If you are willing to take a high-risk, high-reward bet on specific industries.
• If you believe in India’s economic transformation and want exposure to key growth areas.

Final Recommendations: What Investors Should Do Now

 India’s economic direction is shifting towards growth, making this an ideal time to adjust your portfolio.

 Investors should focus on a mix of growth funds, flexibility, and stability to capture market upside.

 SIP (Systematic Investment Plan) investing should continue to average out market volatility.

 Avoid extreme bets – neither be too conservative nor too aggressive.

Why a Financial Planner’s Role is More Crucial Than Ever

Choosing the right mix of funds can be challenging with multiple macroeconomic factors. This is where a Certified Financial Planner (CFP) brings value by:

 Analysing market trends and aligning them with your financial goals.

 Balancing GrowthGrowth with risk management.

 Ensuring that your portfolio remains dynamic and future-proof.

By trusting an experienced financial planner, you can position your portfolio optimally for India’s next growth cycle.

 The future looks promising for Indian markets – investing smartly today can set you up for financial success tomorrow!

Disclaimer

The information provided in this article is for educational and informational purposes only and should not be construed as financial, legal, or investment advice. While every effort has been made to ensure the accuracy of the information, the author and publisher assume no responsibility for errors, inaccuracies, omissions, or any other inconsistencies. Readers should consult a qualified financial advisor or legal professional before making financial decisions. The views expressed in this article are the author's personal opinions and do not necessarily reflect the views of any organisation or entity the author is affiliated with.

About the Author

Taresh Bhatia is a CERTIFIED FINANCIAL PLANNER and a Coach at the Richness Academy. With years of experience guiding individuals and families toward financial freedom, Taresh specialises in helping clients achieve a rich and fulfilling life by aligning their financial decisions with their personal values and long-term goals. As the author of the Amazon best-seller The Richness Principles, Taresh is dedicated to empowering people to take control of their financial destinies and create a life of true wealth and happiness. He offers personalised coaching and mentoring, focusing on senior professionals, entrepreneurs, young married couples, retirees, single mothers, and divorced women. Through his blog, Taresh shares insights on financial planning, wealth creation, and the pursuit of happiness, helping his readers navigate the complex relationship between money and well-being.

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