Navigating Market Turbulence: How ETF-Based smallcases Provide Stability in Uncertain Times

Idea in Focus, February 2025

Introduction

Back in January 2024, we wrote about the merits of a multi-asset portfolio strategy. At that time, we were seeing early signs of a shift—high valuations, retreating Foreign Portfolio Investors (FPIs), and a jittery investor sentiment. Fast forward to today and the Indian markets have taken a sharper plunge over the past two months. The Nifty 50 has shed over ~16% from its peak in Sep 2024 and close to 7% since the start of 2025, mid- and small-cap indices have fared worse, and. So, how do we make sense of this storm, and more importantly, how do we position ourselves for what lies ahead? Let’s revisit the principles of asset allocation and portfolio simplicity, with a spotlight on how our ETF-based smallcases have weathered this turbulence.

The Context: A Sharp Fall in 2025

The past couple of months have been a rollercoaster for Indian investors. A confluence of factors — Trump tantrums, global economic slowdown, a stronger US dollar impacting emerging markets, and domestic concerns like persistent inflation and slowing corporate earnings—has battered equity markets. Unlike the gradual weakness we saw in late 2023, this decline has been swift and steep, catching many investors off guard. For those heavily skewed toward equities, especially small- and mid-cap stocks, the pain has been acute. But as we emphasized in January 2024, markets don’t move in straight lines, and downturns are precisely why diversification across asset classes matters.

Asset Allocation: The Anchor in Rough Seas

When markets nosedive, the instinct is often to double down on equities in hopes of a quick recovery or to flee to cash entirely. Both approaches, however, miss the point of disciplined investing. Asset allocation—spreading investments across equities, debt, gold, and other assets—remains the bedrock of managing risk without sacrificing returns. The recent fall underscores this: while equities have taken a hit, other asset classes have shown resilience. Gold, for instance, has gained traction as a safe haven amid global uncertainty, and debt instruments have provided stability as per their usual behaviour. RBI’s long-standing pause on change in policy repo rates further enhanced the stability component in debt products. 

Our ETF-based smallcases, like the Timeless Asset Allocation smallcase, embody this philosophy. By blending equity ETFs, debt ETFs, and gold ETFs, these portfolios aim to balance growth potential with downside protection. Over the past six months, while pure equity portfolios have seen sharp declines, our multi-asset ETF smallcases have cushioned the blow on the back of prudent asset allocation strategy. This isn’t about avoiding losses entirely—some erosion is inevitable in a broad market rout—but about ensuring the portfolio doesn’t sink as far or as fast.

A Simple Portfolio Strategy: Less Is More

In times of crisis, complexity can be the enemy. Chasing hot sectors, timing the market, or over-analyzing every dip often leads to paralysis or poor decisions. That’s why we’ve always advocated for a simple, rules-based portfolio strategy. The beauty of ETF-based smallcases lies in their clarity: you invest in a pre-defined mix of assets, rebalance periodically (quarterly), and let compounding do the heavy lifting over time. No need to pick individual names or predict the next big winner—just stick to the plan.

ETF-Based Smallcases: Balancing Risk and Returns

So, how have our ETF-based smallcases held up in this downturn? Let’s zoom in. The Timeless Asset Allocation smallcase continued to deliver on its promise of stability. While markets were down and out, Timeless Asset Allocation smallcase only fell by 4.6% between Sep ‘24 and Feb ‘25 as against broader market – Nifty 500’s fall of ~19% in the same period.    

The equity component took a hit, no doubt, but the debt and gold allocations acted as shock absorbers, softening the fall. What has beautifully played as per the common narrative is the way gold has performed during this tumultuous phase. During the time under discussion, Gold managed to deliver returns of close to 13% as against broader market’s (Nifty 500) negative returns of 19%. It has acted as an extremely important safe haven asset class during this distress. This is one of the primary reasons why the Timeless Asset Allocation has managed to outperform the markets. 

Now let’s shift our attention towards the risk parameters and once again our passively managed ETF based smallcases have managed to outperform the Equity Largecap. All our smallcases have managed to deliver lower volatility and lesser drawdowns than the market. 

The lesson? Diversification across asset classes isn’t just a buzzword—it’s a lifeline. Our ETF-based smallcases don’t chase outsized gains in bull markets, nor do they crater in bear markets. They aim for consistency, which is exactly what investors need when headlines scream panic. 

Looking Ahead: Opportunity in the Rubble

The sharp fall of early 2025 has undoubtedly rattled confidence, but it’s also reset valuations. Stocks that were frothy a year ago are now trading at more reasonable multiples, and certain sectors are beginning to look attractive again. For multi-asset investors, this is where the strategy shines: you’ve got dry powder (from debt and gold) to deploy into equities at lower prices. Our ETF smallcases make this painless—rebalancing triggers the shift automatically, no emotional guesswork required.

As we step into March 2025, the road ahead remains uncertain. Will global headwinds ease? Will the RBI signal a pivot? No one knows for sure. But what we do know is this: a well-allocated, simple portfolio built on ETFs can navigate the storm and emerge stronger. The past two months have tested our resolve, but they’ve also reinforced the wisdom of staying diversified and disciplined. So, whether you’re a seasoned investor or just starting out, consider this a reminder: in markets, as in life, balance is everything.

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