The year 2025 delivered a financial wake-up call to many investors in India. While benchmark indices posted a decent 10% gain, a majority of individual portfolios bled red, battered by a severe downturn in small- and mid-cap stocks. The year saw foreign investors flee at a record pace, the rupee struggle, and mutual funds occasionally underperform humble fixed deposits. Yet, as the calendar turns to 2026, a wave of cautious optimism is sweeping through Dalal Street. Money managers argue that the trials of the past year have laid a solid foundation for a comeback, presenting a buffet of opportunities for the discerning investor.
Macro Tailwinds Setting the Stage for Recovery
The optimism isn't born in a vacuum. It's rooted in significant policy actions that are now expected to bear fruit. The GST Council's sweeping tax cuts on nearly 400 items, effective from 22 September 2025, provided a major stimulus. The benefits were quickly visible in sectors like automobiles and consumer durables, where tax rates were slashed from 28-31% to 18%. This followed the historic income tax relief in Budget 2025, which made incomes up to ₹12 lakh tax-free On the monetary front, the Reserve Bank of India (RBI) has been a strong ally, delivering a substantial 125 basis points reduction in interest rates over the past twelve months. This is anticipated to enhance liquidity and spur spending in rate-sensitive sectors like banking, real estate, and consumer durables. "Policy measures implemented during the year, including tax and interest rate reductions, are beginning to yield positive results," said Yogesh Patil, Chief Investment Officer, Equity, at LIC Mutual Fund Asset Management. He expects this to translate into stronger earnings growth for domestic economy-oriented sectors in 2026. This view is echoed across the market. Asit Bhandarkar, Senior Fund Manager, Equity, at JM Financial Asset Management, points to improving rural wages, encouraging credit growth, and the positive impact of a good monsoon and benign inflation as factors that could commence an earnings upgrade cycle. Given this backdrop, the pressing question for retail investors is how to apply the lessons of 2025 and position their portfolios. We asked top fund managers a simple, direct question: Where would you invest ₹10 lakh today? Ajay Arora, Co-CEO of Ashika Investment Managers, advocates for a philosophy centered on diversification and learning from 2025's pitfalls like chasing hot themes and lacking discipline. For a moderate risk appetite, his allocation would be: 30% in data-driven strategy funds, 30% in mid- and small-cap along with dynamic allocation funds, 20% in debt/fixed-income, and 20% in precious metals via ETFs. Vinod Nair, Head of Research at Geojit Financial Services, reveals a shift in strategy. While their 2025 multi-asset approach (60% equity, 40% other assets) worked well, particularly with a 10% gold allocation, they are turning more optimistic on equities for 2026. Their revised, balanced equity approach allocates 85% to equity (60% large-cap, 15% mid-cap, 10% small-cap), 10% to bonds, and 5% to gold. Key sectors of interest include consumption, infrastructure, banking, real estate, and IT. LIC MF's Yogesh Patil emphasizes constructing portfolios around sectors with strong earnings growth potential. He highlights matured businesses in consumption and BFSI (banking, financial services, and insurance) for a potential uptick, while also allocating to high-growth areas like contract development and manufacturing (CDMO), specialty chemicals, green power, and new-age infrastructure such as data centres. A consensus emerging from market analysts is that the narrative-driven excesses of the past are over. "We are likely transitioning from valuation-driven returns to earnings-driven performance," notes Ajay Arora. After sharp cuts in Nifty's earnings projections for FY26 and FY27, many believe the worst is behind. Brokerage firm BofA Securities expects cuts to moderate, with consensus growth estimates for FY27 at around 16%. The firm anticipates an 11.4% upside for the Nifty in 2026, with large-caps continuing to outperform small- and mid-caps. However, it sees selective opportunities within Smid caps in sectors like financials, IT, chemicals, jewellery, consumer durables, and hotels. Positive surprises could stem from a reversal of foreign institutional investor (FII) outflows, potential rate cuts by the RBI and US Federal Reserve, and the conclusion of the long-awaited India-US trade deal, which US Trade Representative Jamieson Greer in December called the "best offer the US has ever received." India's macroeconomic resilience underpins this optimism. GDP growth hit a six-quarter high of 8.2% in Q2 FY26, and India has now overtaken Japan to become the world's fourth-largest economy, with a GDP of $4.18 trillion. The capital markets reflect this vibrancy, with 2025 witnessing a record fundraising of over ₹1.7 trillion through IPOs. While experts differ on exact allocations, there is near-unanimity on a positive outlook for 2026, driven by macro tailwinds and robust domestic liquidity from SIPs and domestic institutional investors. The key for investors, they stress, is to prioritize adequate diversification, a patient approach, and a focus on long-term potential over short-term volatility. That might just be the most gainful New Year's resolution an investor could make.The ₹10 Lakh Question: How Would Experts Invest?
Earnings to Take Centre Stage in 2026
