How investors should position portfolios in 2026 amid volatility, says Morningstar

After a turbulent 2025 marked by volatility, uneven returns and global uncertainty, Indian investors entering 2026 need to prioritise balance, quality and risk management rather than chasing aggressive gains, according to Morningstar’s latest assessment of fund manager positioning.

While Indian equity benchmarks ended 2025 with gains, the journey was far from smooth. Persistent geopolitical tensions, trade risks, foreign portfolio investor (FPI) selling and shifting expectations on global monetary policy repeatedly disrupted market momentum. Against this backdrop, Morningstar’s interactions with Indian fund managers point to a more measured and selective approach for investors in 2026.

Stick with large caps

One of the clearest messages for investors is to anchor portfolios in large-cap stocks. Fund managers continue to maintain higher allocations to large caps, viewing them as relatively resilient during periods of global uncertainty. Large caps outperformed mid- and small-cap stocks in 2025, reinforcing their role as portfolio stabilisers.

However, this does not mean exiting mid- and small-cap segments entirely. Exposure is being calibrated carefully, with a strong focus on selective stock picking rather than broad-based bets. For retail investors, this translates into avoiding excessive exposure to overheated segments while maintaining diversification through flexi-cap or large-and-mid-cap funds.

India’s domestic growth story

Fund managers are positioning portfolios around sectors that benefit directly from India’s domestic economic drivers. Consumer cyclicals, healthcare and industrials feature prominently in allocations going into 2026.

Improving consumption trends, rising incomes and easing borrowing costs are supporting consumer-facing businesses, while healthcare offers a blend of defensive stability and long-term structural growth. Industrials remain attractive due to sustained government spending on infrastructure, manufacturing and defence. For investors, funds aligned with domestic demand themes may offer better earnings visibility in an uncertain global environment.

Be cautious

The report also highlights caution toward sectors more exposed to global headwinds. Technology, basic materials, energy and utilities remain underweight in many portfolios due to slower global growth, pricing pressures, regulatory uncertainty and elevated valuations.

Investors are advised to avoid chasing sharp rebounds in these sectors without clear earnings support. Instead, the emphasis should be on quality businesses with strong balance sheets, pricing power and predictable cash flows.

Debt investors

In fixed income, the approach for 2026 is shifting away from aggressive duration bets. With expectations that the rate-cut cycle is nearing its end, fund managers believe bond returns will be driven more by carry than by sharp movements in yields.

As a result, portfolios are tilting toward shorter-duration funds, high-quality corporate bonds and AAA-rated securities. For investors, this suggests prioritising stability and regular income over capital appreciation in debt portfolios.

Stay disciplined

A key takeaway for investors is the growing importance of disciplined domestic participation. Strong SIP inflows and retail investment helped cushion Indian markets against foreign outflows in 2025, underlining the benefits of staying invested through cycles.

For 2026, investors may be better served by sticking to asset allocation, maintaining diversification across equity and debt, and aligning portfolios with India’s structural growth drivers. The year ahead is likely to reward patience, quality and discipline rather than speculation or short-term market timing.