Double Engine Compounding: How a 50:50 Indo-American equity portfolio boosts your stock market returns

As an investor, ask yourself – “Is my portfolio well positioned to capitalize not just on the growing financial muscle of well-known Indian compounding machines like Titan, Bajaj Finance, HDFC Bank, and Asian Paints but also on global compounding machines like Amazon, Microsoft, Berkshire Hathaway, Nvidia, and ASML?”

If your answer is not in the affirmative, a study titled – Are You Benefitting from Double Engine Compounding? – conducted by Marcellus Investment Managers could be an eye-opener for you.

Amazon, Microsoft, Berkshire Hathaway, Nvidia and many other top global stocks are listed in the US stock market.

The report suggests that America and India, the world’s two largest democracies, offer investors a chance to benefit from a golden decade of compounding.

The 50:50 Indo:American portfolio offers a compelling investment proposition, generating significant risk-adjusted returns compared to a standalone portfolio based on either country’s stock market.

50:50 Indo-American portfolio

A 20-year-old Indo-American portfolio with a 50:50 ratio, rebalanced annually, would yield a risk-adjusted return of 1.26, with a CAGR of 14.4% in INR. Risk-adjusted return refers to the return generated per unit of risk taken.

This surpasses the standalone Nifty50, which had a risk-adjusted return of 0.76 and a compound annual growth rate of 14.2%. While the CAGR difference appears to be tiny (14.4% vs 14.2%), the larger risk-adjusted return (1.26 vs 0.76) has a considerable influence on long-term wealth growth.

To illustrate this further, the report talks about another practical example.

Scenario 1 (India Only): If an investor had invested Rs 100 every year starting from 2005 solely in the NIFTY 50, what would their net wealth be by the end of 2023?

Scenario 2 (US and India Combined): If an investor had invested Rs 100 every year starting from 2005 in both the NIFTY 50 and S&P 500, rebalancing annually to maintain a 50:50 allocation, what would their net wealth be by the end of 2023?

Result: An annually rebalanced 50:50 US and India portfolio (Scenario 2) would have generated nearly 20% additional wealth. This underscores the importance of considering risk-adjusted returns in wealth-building strategies.

US Vs Indian Market – Correlation

The Indian and American stock markets are not perfectly connected, with a correlation of only 0.34 during the last 20 years. So, by running a twin-engine compounding portfolio, you can benefit from diversification, which means your equity returns will be more reliable.

Conclusion

The report concludes by stating that it is evident that by investing in a simple 50:50 portfolio of Nifty50 and S&P500 indices, you benefit from the higher return of the Nifty50 and the lower volatility of the S&P500. The result is far more stable portfolio compounding than is possible from either of the national indices.