India has experienced a remarkable rally in its stock markets since the end of the pandemic, with the country’s total market capitalization surpassing the $5 trillion milestone in May last year.
The BSE Sensex, India’s benchmark index, hit an all-time high of ₹85,978.84 on September 27 last year.
However, it has since declined to ₹75,375.11, marking a sharp 12% drop of over 10,600 points that has left investors uneasy.
While foreign investors have been selling heavily—pulling out $6 billion from Indian equities in January alone—record levels of domestic investment have helped stabilize the market to some extent.
Yet, the ongoing volatility raises an important question: how long will it persist?
To gain deeper insights into the current market scenario, Invezz spoke with Sapna Narang, Managing Partner at Capital League, a prominent Indian boutique wealth management firm.
She shared her perspective on the markets, why investors should remain confident in India’s long-term growth story, the strategic adjustments she’s implementing in her clients’ portfolios, and alternative investment options to diversify wealth.
Here are edited excerpts from the conversation:
Invezz: What is your sense of the current market conditions?
The first thing to understand about India is its strong foundation for long-term growth.
This is driven by several structural changes that have unfolded and will continue to evolve in the coming years.
These include a young demographic, the increasing financialization of household savings, and widespread digitization.
With these factors in place, the Indian economy is poised for robust GDP growth.
Current projections suggest growth rates in the range of 6.5% to 6.8%, potentially closer to 7%.
While periodic fluctuations might occur due to various economic or global factors, even at a growth rate of 6.4%, India remains one of the fastest-growing major economies in the world.
India’s ROE ranks among the highest globally
A large portion of India’s corporate output is for domestic consumption.
This provides a level of insulation from global economic turbulence.
While structural changes underpin long-term growth, domestic and global investors seek markets where returns are evident. And, these returns are driven by corporate earnings.
Over the past decade, India’s average return on equity (ROE) has been one of the highest globally.
At 14%, it stands virtually neck-to-neck with the US at 15%, outpacing other countries.
This strong ROE has consistently maintained India’s premium status among emerging markets.
Notably, over one-third of Indian companies generate an ROE exceeding 20%.
This performance, coupled with the diverse range of thriving sectors—including technology, IT, pharma, and others—makes India an attractive destination for investors.
Regulatory advancements boost investor confidence
India’s equity markets have become increasingly robust because of the continuous efforts by regulators like SEBI.
Initiatives such as enhanced income disclosures, digital investment processes, comprehensive account statements, nomination systems, and stringent checks and balances have made the markets more transparent and retail investor-friendly.
Foreign investors have also benefited from regulatory easing.
A significant milestone was achieved last year when Indian bonds were included in the JP Morgan Emerging Market Index, bolstering India’s appeal to global investors.
Additionally, the government’s focus on economic stability aims to secure improved ratings from agencies like S&P, Fitch, and Moody’s.
These strategic measures reflect a long-term vision that strengthens India’s market credibility.
Revenue growth aligns with nominal GDP
Following the COVID-19 pandemic, corporate earnings surged due to pent-up demand and falling commodity prices.
Over the past three to four years, this trend has kept earnings elevated.
As market conditions normalize, however, corporate earnings are expected to align more closely with revenue growth, which will mirror nominal GDP growth.
This reversion to the mean is part of a natural economic cycle.
While earnings have previously outpaced the long-term average, the foreseeable future is likely to see equilibrium, with bottom-line earnings growth tracking top-line revenue growth at a pace consistent with nominal GDP.
Short-term volatility, driven by developments in the US, has impacted the market recently.
Despite this, India’s structural strengths, regulatory advancements, and sectoral diversity ensure its resilience as an attractive long-term investment destination.
Developments in the US causing market volatility
Recent volatility in Indian markets has been largely influenced by evolving policies in the US.
The newly elected president has announced plans to implement tariffs, protect domestic industries, and incentivize onshore manufacturing.
While these changes may take years to materialize, their anticipation is already affecting global markets.
Since September, the Federal Reserve has cut interest rates, yet yields on 10-year bonds have risen, indicating that market participants remain skeptical about liquidity easing.
Even though the Fed has suggested two potential interest rate cuts in 2025, there is uncertainty about whether these will materialize.
This is largely because the proposed policies are expected to be inflationary.
While the specifics of tariffs and tax policies are yet to be clarified, these measures could boost corporate earnings and the US equity market in the short term.
Consequently, many investors are reallocating funds from overseas markets, including India, back to the US.
This trend is not unique to India—it is being observed across emerging markets.
A stronger US dollar typically triggers capital outflows from emerging economies to the US.
Short-term volatility may persist for six months to a year, but its duration is difficult to predict.
Indian stock markets to deliver 9%-11% returns this year
Despite foreign institutional investors (FIIs) pulling out funds, domestic investors have largely supported India’s markets.
As a result, market performance has remained stable on an annual basis, with only an 8%-9% decline from the peak.
India’s currency has also demonstrated resilience.
Compared to other emerging markets and major currencies like the pound, yen, and euro, the Indian rupee has depreciated the least, reflecting the underlying strength of the economy.
The funds withdrawn by FIIs represent a fraction of their total investment in India, underscoring the sustained confidence in the market.
In the medium term, India’s outlook remains positive.
While the extraordinary returns of 20% in some previous years are unlikely to repeat, this year’s equity market returns are expected to be in the range of 9%-11%.
Of course, unforeseen developments—such as new US tariffs on Indian goods or significant dollar fluctuations—could alter this trajectory.
However, India’s robust economic fundamentals and structural growth drivers continue to position it as a stable and attractive investment opportunity.
Increase exposure to large caps, reduce mid- and small-caps, add gold to portfolios
Invezz: What strategic changes are you making in the portfolios you manage during this period?
Firstly, if we previously had, say, 60% of our portfolio allocated to large-cap stocks, we might now increase that allocation to around 65%.
We are also considering adding a small amount of gold to the portfolios.
As for international equity, we’ve maintained a 10%-15% allocation in international funds over the past several years.
With the limits now being relaxed and as soon as foreign funds open for subscriptions again, we plan to increase that allocation by 2%-3%.
In general, the core asset allocation for each client’s portfolio remains the same.
For example, if a portfolio was previously allocated 60% to debt and 40% to equity, we are continuing with a similar structure.
Currently, we are neutral on equity—we’re neither taking an aggressive stance nor pulling out entirely.
However, within the equity portion, we are making slight adjustments, such as increasing our large-cap exposure.
If mid- and small-caps previously made up 40% of the portfolio, that will now be reduced to around 35%.
Sectors to watch in 2025: infrastructure, defense, metals, cement, real estate
Looking ahead to 2025, the government is expected to ramp up its infrastructure spending and continue the allocations made in the last two to three years.
This should benefit sectors related to infrastructure, so we’ll be closely monitoring how these investments affect the broader economy.
In the defense sector, recent reforms have opened up opportunities for foreign direct investment (FDI), and Indian defense companies are starting to receive orders. This presents a growth opportunity for these companies.
Additionally, we remain positive about metals, cement, and real estate.
However, these sectors can be volatile, so we need to consider specific sub-sectors within real estate—such as commercial versus residential properties—which may behave differently.
Our recommendation for investors is to stay committed to the India story, remain invested, and consider multi-cap, diversified equity funds, where fund managers can handle the fine-tuning of sector allocations.
For those looking to add to their equity exposure, we suggest spreading out the investment over three to five months, depending on the amount being added to the portfolio.
Why crypto remains a no-go for private wealth managers
Invezz: When you speak to private wealth managers, they remain averse to including crypto in their clients’ portfolios. What’s your perspective?
Yes, we will not be incorporating crypto into our portfolios. Let me explain why.
Until very recently, crypto wasn’t legally traded, and it’s only now that it’s been made legal.
However, even with its legal status, there are issues such as the requirement to show any crypto gains as business income, which complicates matters.
On a more fundamental level, there is no clear basis for valuing crypto.
It’s impossible to assess its demand or supply accurately.
Unlike traditional currencies, such as the dollar or euro, which are backed by the economic activity of a country, crypto lacks a similar framework.
There is no established method for valuing it or assessing its underlying fundamentals. That’s why we are steering clear of it for now.
Investing in startups: factors to consider
Invezz: High-net-worth individuals (HNIs) are increasingly investing in startups and private markets. What’s your view on this trend?
It’s a positive trend.
Investors can access these opportunities through private equity funds, and some may choose to invest directly in startups.
As overall wealth grows, more investors are looking into alternative investments.
However, whether this is a good move depends on the risk tolerance of the investor.
Startups and private markets are much higher-risk investments, and the investment tends to be more concentrated.
The gestation period for these investments is long—typically around seven to eight years or more—meaning your money will be tied up for a significant period.
Before deciding whether investing in private markets is suitable for a particular family, there are numerous factors to consider, especially the long-term commitment involved.
Scope of alternative investment funds (AIFs)
Invezz: What alternative investments in India, aside from equities, debt, and traditional instruments, should people consider?
The range of options in alternative investment funds (AIFs) has expanded significantly.
For example, some AIFs invest in B-category bonds, offering higher returns than traditional mutual funds.
While most mutual funds invest in A-rated or AAA-rated bonds, AIFs can take on slightly more risk, as they’re typically geared toward larger investors and may involve longer lock-in periods.
AIFs can be structured to focus on various sectors. For instance, some may focus on venture capital, while others might target private equity.
The investment strategy and risk profiles vary widely within these categories.
Some funds focus solely on tech startups, which tend to carry higher risk compared to more established companies like Infosys or TCS.
This diversity creates a broad ecosystem for alternative investments.
Startups themselves vary greatly, ranging from those in their early stages—looking for initial funding—to those that are more established and seeking growth capital from private equity funds.
So, there is an increasing array of investment options across multiple sectors and stages of business growth, creating more opportunities for investors.
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