50:50 equity-debt portfolio creates meaningful wealth: Study

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A 50:50 equity-debt portfolio generates meaningful wealth creation, says a study by Motilal Oswal Private Wealth.

According to its comprehensive analysis of risk-reward from various portfolio combination for the period between 1990 and 2023 (till September 23), the equal weight debt/equity portfolio has generated 12 per cent return.

Since equities offer the highest long-term compounding return, as expected, the 75:25 equity-debt combination has the highest CAGR at 12.9 per cent. However, the underlying volatility is also the highest across all portfolio combinations, it said.

On a pre-tax basis, the equal-weighted portfolio offer the best risk-reward/compounding return per unit of risk (standard deviation).

“However, the post-tax return from this combination may not be efficient going forward since the capital gains from all asset classes, except Indian equity, would be taxed as short term capital gains,” the report clarified.

Underlying assets

The underlying asset classes for this analysis include Indian equity, US equity, long maturity debt, short maturity debt and gold, all in INR terms. The portfolio combinations include an equal weighted portfolio across all the afore-mentioned asset classes, 25 per cent equity : 75 per cent debt; 50 per cent equity : 50 per cent debt; and 75 per cent equity : 25 per cent debt.

Also read: Broad basing of market will help fund managers generate alpha, says Tata Asset Management Managing Director

Based on a Returns Distribution analysis using 3-year rolling returns (monthly data), the equal weighted portfolio clearly emerges as a superior alternative to traditional fixed income as there is no negative return for a minimum 3-year holding period, and 90 per cent of observations generate higher returns than domestic CPI inflation (6 per cent CAGR).

Risk-based return

The 50:50 combo is a well-balanced portfolio for moderate risk profile investors, Motilal Oswal Private Wealth said. The return distribution shows a low probability of negative returns with around 54 per cent of observations in the double-digit category.

The 75:25 per cent is suitable for aggressive risk takers who expect higher compounding over the long-term while being able to tide through relatively higher interim volatility.



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