Why Indian Stock Markets Underperformed in 2025 and What 2026 May Bring

The year 2025 proved challenging for Indian equity markets, with broader indices underperforming global peers. While emerging markets gained around 20–25% on a dollar basis, Indian markets remained largely flat year-to-date. Midcap and smallcap indices declined over 1.5%, reflecting a shift from the robust performance seen between 2020 and 2024, when the Nifty rose nearly 120% and smaller segments delivered 200–300% returns.

This reversal highlights a key lesson for investors: market narratives are temporary, while long-term goals span decades. What was celebrated as exceptional growth in India just a year ago has given way to caution, underscoring the cyclical nature of markets.

Understanding Market Cycles and Valuation Dynamics

Markets do not guarantee annual gains. Historical data for the Nifty shows that approximately 30% of periods involve declines, 25–30% are sideways, and only 40% deliver strong upward moves—yet those upward phases generate sufficient compounding to achieve 13–14% long-term returns.

After years of elevated valuations (P/E ratios above 23–24 against a fair multiple of 17–18 given India’s 14–16% corporate earnings growth and return on equity), moderation was inevitable. Single-digit profit growth at premium valuations made the market expensive, contributing to foreign investor outflows and muted domestic performance.

Meanwhile, asset classes like gold, silver, Japan, Europe, and the US outperformed. Over 25 years, gold and silver have occasionally surpassed equities, but their recent surges signal overextension rather than superior long-term appeal. Equities remain the primary cash-flow-generating growth asset.

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Managing Emotions in Volatile Times

Fear often peaks during downturns, amplified by concerns over governance issues, promoter sales, or manipulation. Yet markets have grown more robust over decades, with improved regulation, transparency, and governance standards.

Volatility is inherent—smallcaps can drop 50–67% in corrections, as seen in past cycles. The key formula for wealth creation is simple:

Wealth = NAV × Units

Systematic investing accumulates more units during falls, positioning investors for recovery.

A 28-year track record of one prominent flexi-cap fund illustrates this: delivering 19% CAGR (over 100x growth), yet fewer than 20 original investors remained throughout due to average holding periods of just 3–4 years.

Common Mistakes Long-Term Investors Should Avoid

1. Chasing Hot Themes or Recent High Returns
   Popular assets become overpriced. Last year’s enthusiasm for capex, manufacturing, infrastructure, defense, and smallcaps has reversed, reminding investors that median long-term returns matter more than short-term spikes.

2. Buying into Compelling Narratives
   Engaging stories spread rapidly but often ignore valuations. India’s growth story is valid, but purchasing it at 25–30x P/E while overlooking cheaper global opportunities risks underperformance.

3. Short-Term Focus and Frequent Churning
   Investing is a marathon, not a sprint. Time in the market, powered by compounding, drives exponential growth.

4. Ignoring Diversification
   Over-reliance on one asset class amplifies volatility.

Asset Allocation Strategies for Resilience

Long-term compounding primarily comes from equities, which should dominate portfolios for growth-oriented investors. Personal examples vary by age and risk tolerance:

• Young investors (e.g., engineering students): 100% equities, blending Indian and global stocks via SIPs.
• Mid-career: 70% equities (Indian + global), 30% bonds and precious metals.
• Pre-retirement: 50% equities, 50% fixed income.

Blending asset classes reduces volatility significantly. A mix of Indian stocks (13% historical return), global stocks (9–10%), gold (12%), and bonds (7%) can deliver 10–12% returns with one-third the volatility of pure equities.

For those uncomfortable with sharp drawdowns, hybrid or multi-asset funds offer an intelligent compromise, especially when valuations are elevated across assets.

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The Case for International Diversification

Certain global business models—dominant platforms integral to daily life—are unavailable in India and hard to replicate. Opportunities arise when quality companies trade at reasonable valuations during regional cycles.

Blending Indian and global equities lowers portfolio volatility (from 16% to around 10%) while maintaining similar long-term returns. Funds with flexibility across geographies, or dedicated global options (including GIFT City vehicles), enable capturing undervalued dominant businesses worldwide.

Key Behavioral Traits for Success

• Delayed Gratification: Resist immediate spending; prioritize saving and investing.
• Frugality: Distinguish needs from wants, avoiding brand premiums that enrich others’ shareholders.
• Patience and Discipline: Embrace volatility, maintain faith in quality companies, and focus on long horizons.
• Rational Detachment: Avoid euphoria or fear-driven decisions.

Final Conclusion

Periods like 2025, when compounding pauses, are opportunities to accumulate units at better prices. Valuations may remain elevated into 2026, potentially leading to time corrections (sideways movement) rather than sharp declines.

For lump sums in heated markets, systematic transfers into hybrid or multi-asset funds spread risk. Long-term investors should continue SIPs, diversify sensibly, and remember: time is the most powerful factor in compounding. Start early, stay invested, and let quality businesses deliver over decades.

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