Volatility is Here to Stay! There could be another 5-10% correction before recovery begins: Experts

Market volatility is an inevitable part of investing, and given the current global and domestic uncertainties, it’s more crucial than ever for investors to adopt a well-balanced asset allocation strategy.

Top fund managers share their insights on how investors can navigate these uncertain times while optimizing their portfolios for both risk management and long-term growth.

Volatility Is Here to Stay

In an interview with ETNow Aman Chowhan, Fund Manager at Abakkus Asset Manager LLP, investors should brace themselves for continued volatility. While earlier global markets were the primary source of instability, India is now also experiencing domestic headwinds.

"Markets dislike uncertainty, and as a result, momentum, confidence, and sentiment remain weak. We are still in a phase where things might get worse before they get better. While we may not see a drastic 30-40% correction from current levels, a further 5-10% downside in the near term is possible before a meaningful recovery begins." says Chowhan.

Large Caps vs. Mid Caps: Striking the Right Balance

When it comes to structuring a portfolio, risk appetite and investment horizon play a crucial role. Aman Chowhan believes that while large-cap investments provide stability, midcaps should not be ignored for wealth creation.

"It’s common to hear that large caps are the safest bet in volatile times, and while that is true, a balanced approach is necessary. If an investor has a 3-4 year investment horizon, at least a 50-50 allocation between large caps and midcaps is ideal. Midcaps are where India’s growth potential and entrepreneurial spirit thrive. Large caps offer steady returns, but to generate real alpha, investors must tap into mid-market opportunities," Aman Chowhan, Fund Manager, Abakkus Asset Manager LLP

He further highlights that while small-cap and micro-cap stocks carry higher risks, midcaps provide an optimal risk-reward balance.

Sectoral Considerations: Where to Look for Opportunities

Discussing sectoral allocations, Aman Chowhan highlights that the banking sector remains a stronghold due to its recent underperformance, limiting its downside potential. He also sees strength in IT and Pharma due to macroeconomic factors.

"Banking, which holds the highest weightage in Nifty, has lagged in the last two years, leaving limited downside risk. IT will continue to benefit from currency movements, and despite some tariff concerns, pharma stocks are showing resilience. While Nifty itself may not see a sharp correction, broader indices and select stocks could still witness a 5-10% downside before stabilizing." – Aman Chowhan, Fund Manager, Abakkus Asset Manager LLP

The Role of Asset Allocation in Risk Management

Pradeep Gupta, Co-founder & Vice-Chairman of Anand Rathi Group, emphasizes the importance of diversification to mitigate risks. Instead of going all-in on equities, investors should spread their capital across various asset classes to ensure capital protection and consistent returns.

"While capital protection remains a priority in 2025, investors must view risk management through the lens of asset allocation. A well-diversified portfolio can help balance risks and rewards efficiently." – Pradeep Gupta, Co-founder & Vice-Chairman, Anand Rathi Group told ETMarkets.

The Case for Large Caps in Uncertain Markets

Adding to this perspective, Nitin Aggarwal, Director of Investment Research and Advisory at Client Associates, advises that investors should lean towards high-quality large-cap stocks that offer capital protection while maintaining reasonable growth potential.

"Though an investor’s time horizon determines their exact allocation, we recommend focusing on large-cap, high-quality companies that are fairly valued and offer steady, long-term growth." – Nitin Aggarwal, Director of Investment Research & Advisory, Client Associates told ETMarkets.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)