How Asset Allocation smallcases Delivered Stability Amid Market Volatility

Pure equity smallcases carry higher risk since they invest only in stocks. Any market downturn or negative sentiment can drag performance, especially in midcap and smallcap spaces, which are naturally more volatile. This has kept some investors away from specific Windmill Capital smallcases, even if they liked the core strategy.

To address this, we created an asset allocation version of these 4 smallcases. These smallcases were GEM-Q – Asset Allocation Model,  Value & Momentum – Asset Allocation Model,  Growth at a fair price – Asset Allocation Model, and Smallcap Quality & Growth – Asset Allocation Model; you can check them out here. 

In these smallcase while equity exposure follows the same strategy or theme as the pure equity version, a portion of the portfolio is also invested in other asset classes like debt and gold. This diversification cushions the downside—if equities fall, gold, and debt can provide stability. The goal is to deliver strong returns but with much lower risk.

Our proprietary framework tracks price strength across Nifty Largecap, Midcap, and Smallcap indices. Based on this, the model decides whether to stay invested in equities or move fully into gold and debt through ETFs. When market strength is weak, the model shifts out of equities into gold and debt (split equally). When strength improves, it switches back into equities.

This systematic, rule-based approach helps investors enjoy the benefits of pure equity strategies while aiming for better risk-adjusted returns, without having to time markets themselves.

Market Backdrop: India vs Global Peers

Over the past year, Indian markets have been subdued, with the Nifty 500 ending nearly flat and lagging several global peers. The weakness has been driven by soft corporate earnings, sharp downward revisions to revenues and profits, and continued geopolitical and macroeconomic headwinds. In this backdrop, the RBI has eased policy, reducing the repo rate from 6.5% to 5.5% during the year. Indian markets initially gained momentum from regulatory measures, with the Nifty rising about 11% between April and June 2025. However, sentiment has since turned cautious, with the index slipping nearly 3% post-June. This reversal reflects mounting concerns around punitive U.S. tariffs, escalating geopolitical tensions, strains in Indo-U.S. relations, and renewed FII outflows.

Performance Review Across Key Periods

Against this backdrop, let’s review how the asset allocation (AA) smallcases performed. 

By late September 2024, markets had begun to decline, prompting our proprietary models to signal an exit from equities on October 27, 2024. The models then indicated a re-entry in December, followed by another exit on January 11, 2025. From that date, the asset allocation smallcase stayed out of equities until May 17, 2025, after which it moved back into equities and remained invested until mid-August 2025.

The table below shows the performance of these asset allocation smallcases across the specified periods, along with their cumulative performance.

Let’s start by looking at the Jan’25–May’25 period, which highlights an important dimension of AA smallcases. During this time, they exited equities and shifted into an equal mix of gold and debt. Their outperformance came from these allocations, with gold delivering strong returns—showing how diversification adds value when equities are under pressure.

Across the broader period from Oct 27, 2024, to Aug 10, 2025, the median return of AA smallcases was +0.8%, compared to –0.2% for equity multicaps, with 3 out of 4 models delivering positive returns. Cumulatively, this edge reflects their ability to switch across asset classes at opportune times, resulting in returns that were marginally better than pure equity benchmarks.

This move into gold and debt was not arbitrary—it was guided by our proprietary model signals, which have historically indicated when stepping out of equities can enhance performance. Importantly, it’s not just about “rotating into gold.” The models provide a systematic framework for reallocating across asset classes, ensuring that these smallcases are not merely trying to time markets, but rather using signals to improve outcomes in different market environments.

The second important dimension of AA smallcases is drawdown. Drawdown represents the fall in the value of an investment from its highest point (peak) to its lowest point (trough) during a given period — in other words, how much the portfolio declined from its peak.

As seen in the last column, AA smallcases experienced smaller drawdowns compared to the universe of equity multicap stocks. This matters because lower drawdowns allow portfolios to recover more quickly and lead to better risk-adjusted performance over time.

The Role of Risk Management

Asset allocation smallcases are designed with a clear focus on risk management. They allow investors to lock in profits and shift into safer asset classes like debt, gold, or cash when market sentiment turns negative.

What Investors Should Keep in Mind

That said, during sideways markets, investors should expect higher churn due to the methodology, which could lead to slightly higher costs.

The aim of these smallcases is to bridge the gap between high-return strategies and risk control. By combining proven equity themes with dynamic allocations to other asset classes, they provide a more resilient investment experience—seeking strong returns while cushioning downside risks.

Ultimately, these smallcases are built to adapt across market conditions, helping investors stay invested with confidence without worrying about market timing.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of a SEBI recognized supervisory body (if any) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary. Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.