Steering Global Economic Risks and Its Impact on Indian Mutual Funds

It has been almost six years since the Covid-19 market correction, and a lot has happened since then. We have seen ups and downs, from the Russia-Ukraine conflict in 2022 to tariff-related worries in early 2025. Yet, despite these bumps, global markets have largely moved upward over the long run. Many governments spent heavily during Covid to support their economies. That spending pushed debt levels very high.

For example, U.S. government debt has crossed 120 per cent of GDP, one of the highest ever. When debt gets this big, markets start worrying about how governments will manage it. That is why, even though many central Banks cut interest rates from the time U.S. Fed started cutting rates in September 2024, long-term bond yields have gone up. It is a signal that investors are cautious about government finances.

This could mean inflation may stay higher than usual, real returns (returns after inflation) may be negative, and markets could see bouts of volatility driven by developments in the U.S. and other major economies. The U.S. market is driving global moves as it makes up more than half of the world’s stock market. A big part of that comes from a handful of giant companies, the ‘Magnificent Seven’. They have done incredibly well, but they are also expensive and investing heavily in AI with unclear payoffs. If these companies correct, global markets, including India, may react.

Thus, global risks to remain mindful of:

- Geopolitical tensions (any conflict can disrupt supply chains or push up oil prices).

- Tariff-related disruptions to global trade.

- High government debt leading to higher global bond yields.
 

India: Strong at Home, but Exposed to Global Factors
Here is the good news first:
- India’s economic macros are strong in terms of fiscal deficit, current account deficit, forex reserves, and inflation.

- Balance sheets of the Government, banks, corporates, and households are healthy.

- Expect capex to pick up as capacity utilisation picks up.
 

However, India is not fully insulated from global risks. Key things to watch:

- If global yields rise; Indian yields or the rupee may feel the pressure.

- A global market correction can affect domestic markets.

- Oil price spikes hurt India more because we import most of our crude.

- Valuations in India – Markets have cooled a bit over the last year and rupee depreciation also makes India more attractive for the foreign investor, but overall valuations are still above historical averages. Large-Cap stocks are better priced compared to Mid-Caps and Small-Caps, considering growth differences between large, mid, and small companies have narrowed in the last two years. This makes large-caps a relatively safer and more reasonable option right now.

In today’s environment, this balanced approach works best:

- Stick to asset allocation: Decide the mix of equity, debt, and other assets, and stay disciplined rather than chasing returns.

- Prefer stability: Large-cap–oriented funds or Hybrid Funds (equity + debt) may help reduce volatility.

- Invest gradually: Use SIPs or staggered investments instead of lump-sum deployments to smoothen out market ups and downs.

- Be patient: Given global uncertainties, a slightly longer investment horizon can help you ride out volatility and benefit from long-term growth.

Disclaimer: The opinions expressed above are of the author and may not reflect the views of DSIJ.