Your smart investment playbook for FY27: What to buy, what to avoid and how to diversify after a rough FY26

Synopsis

FY26 left your equity portfolio bruised. As FY27 begins, here’s how to heal it.

A new financial year has begun, but for India’s retail equity investors, there is little that feels like a fresh start. The portfolios they are carrying into Financial Year (FY) 2026-27 are bruised. And the environment that bruised them hasn’t fully cleared.

Any hopes of a resolution have now been dashed. Twenty-one hours of face-to-face talks between the US and Iran in Islamabad ended without agreement on Sunday, leaving the fragile 2-week ceasefire in serious doubt. The US has threatened to blockade the Strait of Hormuz, and crude prices — already elevated — could spike further if the conflict re-escalates. For Indian equity investors, this is precisely the kind of scenario that makes the path ahead so difficult to read.

Meanwhile, FY 2025-26 was, by any measure, a punishing year for Indian equities. The Nifty 50 ended the fiscal with a 3.6% loss, its worst annual performance since FY 2019-20. And among 15 major global indices, India ranked last. For retail investors who had leaned heavily into equities during the post-pandemic rally, the disappointment cut deeper: the Nifty’s compounded annual growth rate (CAGR) over the past two years stood at a near-flat 0.01%.

Retail investors often buy aggressively in bull phases and panic during corrections, locking in losses. In volatile times, the urge to exit equities or make abrupt allocation shifts is strong, but the effect is often counterproductive. With domestic investors now owning nearly 20% of listed equities as of December 2025 (up from 13% in 2015), household wealth is more exposed than ever to market swings. And so, as FY27 begins, the question is not whether markets have been difficult—they have—but what you, as a direct equity investor, should do next.

Why your portfolio took a hit

Even before geopolitical tensions (involving Israel, the US, and Iran) rattled global markets, Indian equities were already struggling with stretched valuations, uneven earnings, sluggish domestic demand, and uncertainty around US trade tariffs. The hike in securities transaction tax (STT) on equity derivatives further dampened sentiment. Understanding the macro environment is critical to setting realistic expectations.

India’s reliance on crude imports— over 85% of its energy needs—makes it vulnerable to geopolitical shocks. Brent crude jumped to $118.3 per barrel on 31 March 2026, from a one-year average of $68.7, triggering ripple effects: a wider current account deficit, higher inflation and rising bond yields. The RBI estimates that every $10 rise in crude adds about 49 basis points (one basis point is one-hundredth of a percentage point) to inflation and 43 basis points to the current account deficit.

Bond markets have already responded. The 10-year government bond yield averaged 6.8% in March 2026, up from 6.5% a year earlier, and breached 7% in early April. The rupee has weakened sharply — from Rs.85.6 per dollar in April 2025 to Rs.94.65 by March 2026 — prompting foreign portfolio investors to pull out Rs.1.81 trillion from Indian equities in FY26, the largest annual withdrawal on record. Goldman Sachs has cut its 2026 GDP growth forecast by 1.1 percentage points to 5.9%, raised its CPI inflation estimate to 4.6%, and now expects the repo rate to rise to 5.75 —a cumulative 50 basis point hike—through the year.

Will corporate earnings get worse?

Elevated crude prices squeeze corporate margins directly. With crude-linked inputs across paints, packaging and logistics, rising energy costs are set to pressure profitability amid weak demand. Aviation, ceramic tiles, oil marketing companies and gas utilities are most exposed. Systematix Research estimates that a 40% rise in crude prices to an average of $100 per barrel could raise raw material costs by nearly 20% — well ahead of expected sales growth of 12% — compressing operating margins by as much as 36%.

Where should you be now?

While markets have corrected meaningfully, valuations continue to signal caution. At the aggregate level, the risk-reward equation remains unfavourable. The Nifty 50’s price-to-earnings (P/E) ratio declined 14% in the first quarter of 2026 to around 19.9 times, according to NSE data. However, Systematix Research expects further derating towards 18 times as higher risk-free rates and slower growth continue to pressure both earnings and multiples. On a relative basis, Indian equities remain expensive. The MSCI Emerging Markets Index trades at a historical PE of about 16.6 times, implying a valuation premium of nearly 20% for India— despite weaker near-term earnings visibility.

Across market-cap segments, the riskreward balance continues to favour large-cap stocks, which offer stronger balance sheets and a higher margin of safety. The Nifty Midcap 150 and Nifty Small Cap 250 currently trade at premiums of 56% and 34%, respectively, to the Nifty 50, underscoring the valuation risk in broader markets.

Fear factor

India versus global peers

Indian benchmark lags global peers amid multiple challenges.

Don’t count on a quick rebound

Many investors instinctively look to past crises for reassurance — the swift recoveries after the Global Financial Crisis of 2008 and the Covid-19 pandemic suggest that downturns are always followed by sharp rebounds. But this time, the conditions that enabled those recoveries are largely absent. Back then, policymakers had room to deploy aggressive fiscal and monetary stimulus. Today, elevated public debt and persistent inflation significantly limit the scope. Central banks are constrained, crude prices are expected to remain elevated due to infrastructure damage and geopolitical realignment, and earnings visibility remains poor. As a result, the recovery is likely to be slower and uneven.

10Y bond yield (%)

Valuations

Large-cap stocks are relatively better positioned, though overall market valuations remain expensive compared to emerging markets.

FPI flows

Record FPI equity outflows in FY26 due to geopolitical tensions, weak rupee, and attractive valuations in other EMs.

Which sectors to buy, or avoid

Despite near-term challenges, India’s longterm equity outlook remains broadly positive. A recovery in consumption—supported by tax relief measures and potential GST rationalisation—a well-capitalised banking system, and policy continuity are expected to underpin growth over time.

Shreyash Devalkar, Head–Equity, Axis Mutual Fund, says geopolitical events can introduce sharp but temporary volatility in financial markets. While such episodes tend to dominate short-term price movements, history suggests they rarely alter long-term equity outcomes. “For Indian investors, the more durable drivers of returns remain domestic earnings growth, balance sheet strength and valuations.

From an allocation perspective, a balanced approach with a bias towards large, highquality companies remains prudent, supplemented by selective exposure to domestic growth sectors where earnings visibility is strong, “ he says.

Sectorally, businesses driven by domestic demand and supported by solid balance sheets—such as financials, capital goods and healthcare—are better positioned to withstand external shocks. Investors should align their equity exposure with an investment horizon of at least three to five years, allowing earnings compounding to play out across market cycles, he adds.

Bhautik Ambani of AlphaGrep cites demographics, formalisation, digital infrastructure and rising financialisation of savings as key tailwinds for Indian equities. Anirudh Garg, Partner and Fund Manager at INVasset PMS, says India’s structural macro fundamentals remain strong. Over a threeyear- plus horizon, he sees Indian equities as among the most attractive in emerging markets, especially if foreign flows stabilise and earnings improve.

Sector-wise, analysts see selective opportunities in hospitals, hotels, capital goods, defence, railways and infrastructure.

Note:“Be prepared for a 10–15% correction from here. Don’t become too aggressive, but also don’t be so complacent that you stay out of the market.”

RAAMDEO AGRAWAL

Chairman and Co-founder of Motilal Oswal Financial Services

Your FY27 gameplan

The current environment offers an opportunity to accumulate quality businesses at more reasonable valuations. Experts advise retail investors to avoid abrupt, emotiondriven changes in allocation. Asset allocation decisions should be guided by individual risk tolerance and investment horizons rather than market narratives or peer behaviour. Raamdeo Agrawal, Chairman and Cofounder of Motilal Oswal Financial Services, says, “We have seen a reasonable market correction. This is a good time to invest a lump sum. Further downside is limited, and you cannot time the market bottom. Over the next 12 months, the upside is likely to be higher than the downside. However, don’t leverage yourself. Be prepared for a 10–15% correction from here. Don’t become too aggressive, but also don’t be so complacent that you stay out of the market.”

Shyam Sekhar, Chief Ideator and Founder, ithought Financial Consulting, says, “Direct stock investors need a reliable way to assess portfolio quality—whether companies can grow earnings this year and next, and whether current valuations justify holding them. Many portfolios today look weak and vulnerable because they were built for a very different market context. They will not recover automatically if the underlying holdings are weak. The first priority should be risk management, followed by growth.”

He adds that investors must own businesses that can both grow and re-rate. “The period between 2020 and 2024 was one of relatively easy, linear investing. The problem began in 2024, worsened in 2025, and is now intensifying. Those who acted early— by selling or moving partly to cash— are better placed. Those acting now are already late. Delayed risk management will lead to collateral damage. Many DIY portfolios today look imbalanced, weak and vulnerable,” he says.

Be selective within equities: Within equities, large caps offer stability and liquidity, while selective midcap exposure via active strategies can capture growth as earnings recover. Rishabh Nahar of Qode Advisors PMS says scalable mid-caps are emerging, but valuation discipline and stock selection remain key. Small-cap stocks, meanwhile, remain the most vulnerable to excesses on both the upside and downside. Nahar advises investors to be cautious in the small-cap segment and to focus only on companies with strong governance, sound balance sheets, and clear earnings visibility.

Deploy fresh money in tranches: If you have cash to deploy, resist the urge to go all-in on the basis that markets “look cheap.” A staggered approach — deploying a fixed amount at regular intervals regardless of price — brings discipline to the process and removes the anxiety of trying to call the bottom.

Vinay Paharia, CIO, PGIM India Mutual Fund says, “It is a good time to increase allocation to Indian equities. More importantly, the risk-reward is highly favourable for high growth and good quality business, wherein valuation as well as earnings growth both are in favour for long-term investing.”

Keep global diversification

Analysts also encourage retail investors to consider international diversification to help manage volatility in India. It provides exposure to broader sectors and helps diversify risks. Avinash Gorakshaka, a Sebi-registered research analyst, says that international diversification helps diversify portfolio risks, as global markets do not always move in tandem with the domestic market, thereby reducing the impact of local downturns. (See ‘Your next Rs.10 lakh deserves a passport’, P8)

Furthermore, rupee depreciation is a critical component that enhances returns from foreign investments. When an investor invests in global equities (say, US stocks), the returns are in USD. If the rupee weakens, each dollar converts into more rupees, which improves the returns.

Investors can gain exposure to international equities through international funds or Indian mutual funds that invest in global equities. Furthermore, investors can invest through the Liberalised Remittance Scheme (LRS), which allows individuals to remit up to $250,000 annually to invest directly in foreign-listed securities. In the first quarter of 2026, the global funds showed resilience in comparison to equity diversified funds, while the category average of global funds was -6.8% compared to -12.8% for the diversified equity funds.