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At Truemind Capital, our broad understanding has been:
- Equity markets are expected to deliver muted returns owing to pricey valuations
- Short duration debt funds will perform better on a risk-adjusted basis in the debt category
- Gold could be a good portfolio hedge
Positioning our client portfolios based on these expectations allowed us to yield positive returns, which neither benchmark indices nor longer-term debt funds could.
Equity Market Insights:
Indian equity markets remained directionless during the October–December 2025 quarter. After a prolonged correction through much of the year, benchmark indices saw intermittent recoveries but failed to establish a sustained uptrend. Over the quarter, markets largely moved within a narrow range, reflecting consolidation rather than a clear directional trend. While indices ended 2025 in positive territory, Indian equities continued to underperform several global peers over the trailing one-year period.
On December 31, the BSE Sensex rose 545.5 points to close at 85,220.6, ending the year on a firm note, rising 9% y-o-y. However, this year-end rally did little to alter the broader picture. Market participation remained narrow, with mid- and small-cap stocks continuing to face pressure after strong multi-year gains. This was evident in the uneven performance across the broader market, where returns were driven by select pockets rather than broad-based participation.
Globally, growth has remained resilient, but signs of moderation are becoming more visible across major economies. While recession risks appear contained for now, markets are increasingly entering a late-cycle phase, where returns are likely to be uneven and selective. Equity performance continued to benefit from ample liquidity and expectations of rate cuts, even as geopolitical risks, trade negotiations and policy uncertainty remained elevated. Toward the end of 2025, sentiment in US equities softened, with the S&P 500 ending December largely flat after a volatile month, reflecting more cautious investor positioning.
Looking ahead, corporate earnings growth has moderated meaningfully. After the unusually strong FY23-FY24 period, profit growth has cooled to high single digits, with revenue growth also remaining modest. Forward expectations point to a more measured growth environment, suggesting that the exceptional, liquidity-driven returns of the previous cycle are unlikely to repeat in the near term.
Although valuations in Indian equities have corrected from earlier peaks, they remain above long-term averages, particularly in mid and small caps, limiting upside despite an improving macro backdrop.
One important theme to watch globally is the sharp rise in AI-led investments, particularly in markets like the US & South Korea, which have driven a significant share of recent capital spending and supported near-term growth. However, the durability of AI demand and the pace at which these investments translate into sustainable cash flows and investor returns remain uncertain.
In addition, ongoing geopolitical developments, including trade policy uncertainty, elevated fiscal deficits across several developed and emerging economies, and rising geopolitical tensions, continue to add to global risk. In such an environment, strong macro data alone may not translate into broad market gains, reinforcing the importance of discipline and selectivity in equity investing.
What we are doing?
Against this backdrop, we remain measured in equity exposure. Portfolios are tilted towards large-cap and value-oriented strategies, complemented by selective global exposure primarily in China equities for diversification, while avoiding aggressive thematic and momentum-driven allocations. We expect equity returns over the medium term to be more modest and earnings-driven, making disciplined portfolio construction more important than chasing popular trends.
Debt Market Insights:
Debt markets remained active during the October–December 2025 quarter, with flows largely influenced by liquidity conditions and seasonal factors rather than any deterioration in credit quality. The short-term yields in India showed a mild upward drift through Q4 2025 despite the repo rate cut by the RBI. This happened primarily due to a tightening banking system liquidity from robust credit growth outpacing deposits.
The Reserve Bank of India cut the repo rate by 25 basis points in early December, taking it to 5.25%, as inflation remained benign and growth concerns persisted. At the same time, the RBI continued to actively manage liquidity through open market operations and forex swaps to ensure smooth transmission of policy easing.
However, bond markets faced pressure from elevated supply, particularly higher-than-expected state government borrowings. As a result, long-term yields moved higher during the month, with the 10-year government bond yield briefly touching multi-month highs before settling near the 6.6% level by the end of December. This reinforced the sensitivity of long-duration bonds to supply dynamics, even in an easing rate environment.
Globally, liquidity conditions also turned more accommodative. In the US, the Federal Reserve announced renewed purchases of Treasury bills to rebuild reserves in the financial system, effectively injecting liquidity even as policy rates remain elevated. This return of balance-sheet support shows the continued reliance of global markets on central bank liquidity, particularly amid high fiscal deficits and late-cycle economic conditions.
Our Approach to Debt Allocation
At Truemind, we continue to view debt as a stabilising component of portfolios rather than a source of return maximisation. While interest rates have begun to move lower, the experience of the past year reinforces our preference for shorter-duration strategies, which have delivered more consistent risk-adjusted outcomes compared to long-duration funds.
With long-term yields remaining sensitive to supply dynamics and global developments, we believe the risk-reward trade-off for extending duration remains unfavourable at this stage. Accordingly, our focus stays on short-duration and high-quality accrual strategies that offer stability and liquidity.
From a post-tax perspective, arbitrage funds remain a relevant option for investors in higher tax brackets, offering debt-like returns with relatively efficient taxation.
Going forward, while debt fund flows are expected to normalise as tax-related pressures ease, the trajectory of bond yields will continue to be influenced by inflation trends, government borrowing, and monetary policy actions – both domestically and globally. In this environment, maintaining a disciplined, risk-aware approach to debt allocation remains critical.
Other Asset Classes:
Gold remained one of the strongest-performing asset classes throughout 2025, extending its gains into the recent quarter. The rally was supported by elevated global uncertainty, sustained central bank buying, and expectations of lower real interest rates globally. Moreover, currency weakness in several markets further reinforced gold’s role as a portfolio hedge. Consistent with our long-held view, gold has once again demonstrated its value as a strategic diversifier rather than a trading asset.
The real estate sector, on the other hand, witnessed its weakest quarter since Q3 2021 in terms of sales volume, despite the festive season that usually drives demand. This can be attributed to a market shift towards premiumisation, where the total value of sales increased even as the number of units sold fell. Higher prices and tighter affordability have slowed transaction volumes despite steady demand in select segments. Given its inherent illiquidity, long holding periods, and cyclical nature, real estate should not be the dominant component of one’s overall wealth strategy.
Truemind’s Model Portfolio – Current Asset Allocation
Personal Finance Capsule:
Beware of Expensive Debt Investments
Who will take over your investment decisions after you?
For any query or discussion, you can get in touch here: https://www.truemindcapital.com/contact-us
