It has been a roaring year for equity investors with the Sensex rising 25 per cent in the past 12 months, the best returns in a financial year since 2009/10. Fixed-income instruments also gave good returns with the benchmark 10-year government securities yield falling by 131 basis points to 7.79 per cent from 9.10 per cent during the same period. Though it was a good year for both equity and debt investors, the fact that the Indian investor was back to the equity markets is encouraging. The influx of retail investors saw equity mutual fund inflows surging to over Rs 62,500 crore in 2014/15, the best year in almost a decade for the mutual fund industry.

The optimism in the stock market was fuelled by the Narendra Modi-led government at the Centre. The buoyant mood led to expectations of policy reforms, which further drove growth. The other reason why investors moved to the equity market was the performance of physical assets - real estate and gold lost charm. Gold, for instance, lost 11.5 per cent in the past year. Even the commodities cycle fell and, going ahead, the pain is expected to persist. The global economic slowdown and excess supplies have seen crude oil prices plunging by 53 per cent and exotics, such as art, have still not found favours among investors after running into rough weather towards the end of last decade. Real estate is still reeling in pain and it is likely to persist for another 18 to 24 months with most builders sitting on inventories for 60 months.

FII funds have been the lifeline of the Indian market. If foreign investors continue to pump in money into Indian equities, the market will keep surging irrespective of what happens. In the past three months FIIs have invested nearly $5.9 billion (compared with $3.6 billion in 2014), of which $1.9 billion came in March. FIIs will continue to invest if the Indian economy records robust growth. Indeed, global investors are eyeing opportunities in two markets - India and the US. India has received the highest foreign fund inflows among emerging markets in the past year. While foreign investors are positive on India, the government also needs to push key reforms. Meanwhile, if pressures on food prices exist it will restrict the Reserve Bank of India (RBI) from cutting rates.

With corporate India not out of the financial mess and benefits of the rate cut likely to be visible only after five-six months, investors should follow an asset allocation strategy rather than dabbling with different investment products. With limited options, investors should have a balanced approach between equities and debt. However, after a great year, the outlook should be one of guarded optimism and investors must not get carried away with last year's performance. One way of diversifying this year could be dividing equity and debt investments with a minimum exposure of 30-40 per cent in debt and 60-70 per cent in equities. For detailed advice on investing from market experts, read Business Today's investment special package here.