Capital Allocation

It answers the question: how much goes into stocks, how much into debt, how much stays in cash?

Within stocks, it is about how much goes to each sector or stock.

Good capital allocation is what separates investors who survive downturns from those who do not.

In India, a common capital allocation framework starts with your age. A 25-year-old with a stable salary might put 80% in equities and 20% in debt. A 55-year-old nearing retirement might flip that to 30% equity and 70% in safe instruments like PPF, Senior Citizen Savings Scheme, and RBI floating rate bonds. The idea is that younger investors can ride out market crashes because they have decades of earning years ahead.

Within your equity allocation, capital should be distributed thoughtfully across market caps and sectors. A common split is 50% in large-caps (Nifty 50 stocks like Reliance, TCS, HDFC Bank), 30% in mid-caps (Nifty Midcap 150 names), and 20% in small-caps. Sector-wise, avoid putting more than 25-30% in any single sector, banking, IT, pharma, FMCG, and auto should all get a fair share.

Keeping a cash reserve is an often-overlooked part of capital allocation. Holding 10-15% of your portfolio in liquid funds or a savings account gives you the ability to buy quality stocks during sharp corrections on NSE. Investors who had cash available during the March 2020 crash could buy Infosys at ₹550 or HDFC Bank at ₹850, stocks that doubled within 18 months.

Rebalancing is the maintenance step that most Indian investors skip. If your equity allocation grows from 60% to 75% after a bull run, you are now taking more risk than planned. Selling some equity and moving profits into debt or gold brings your allocation back to target. On platforms like Zerodha Console or Groww, you can check your allocation percentages monthly and rebalance when any asset class drifts more than 5% from your target.