An Investment Portfolio with 50% Equity: 50% Debt can generate meaningful wealth creation in the long term for moderate risk profile investors, according to an analysis by Motilal Oswal Private Wealth. During the period of the analysis spanning over three decades, the 50% Equity: 50% Debt portfolio combination generated a 12% CAGR.
Motilal Oswal Private Wealth conducted a comprehensive analysis spanning over three decades from 1990 to 2023 (till the end September 2023), evaluating the risk-reward from various portfolio combinations.
The underlying asset classes for this analysis included Indian Equity, US Equity, Long Maturity Debt, Short Maturity Debt and Gold, all in INR terms.
The portfolio combinations included an Equal Weighted Portfolio across all the aforementioned asset classes, 25% Equity: 75% Debt, 50% Equity: 50% Debt, and 75% Equity: 25% Debt.
The analysis shows that on a pre-tax basis, the Equal Weighted Portfolio has the best risk-reward, i.e. compounding return per unit of risk (standard deviation).
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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.
“A 50% Equity: 50% Debt portfolio has the potential to generate meaningful wealth creation in the long term, as demonstrated by the 12% CAGR that this combination has generated over the period of analysis,” Motilal Oswal Private Wealth said in a statement.
Since Equity is an asset class which offers the highest long-term compounding return, as expected, the 75% Equity: 25% Debt combination has the highest CAGR at 12.9%, however the underlying volatility (standard deviation) is also the highest across all portfolio combinations.
| Portfolio Combinations | Equal Weighted Portfolio | 25% Equity & 75% debt | 50% Equities & 50% Debt | 75% Equities & 25% Debt |
| CAGR from 1990 to 2023 (end Sep’23) | 11.7% | 10.6% | 12.2% | 12.9% |
| Standard Deviation (annualized) | 8.0% | 8.4% | 14.3% | 20.3% |
Source: AceMF; Bloomberg
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, since there is no negative return for a minimum 3 year holding period, and 90% of observations generate higher returns than domestic CPI inflation (6% CAGR).
The 50% Equity: 50% Debt is a well-balanced portfolio for Moderate Risk Profile investors. The return distribution shows a low probability of negative returns with around 54% of observations in the double-digit category.
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The 75% Equity: 25% Debt would be suitable for Aggressive Risk Profile who would prefer their portfolio to generate higher compounding over the long term while being able to tide through relatively higher interim volatility.
| Returns Distribution (3 Year Rolling Returns) | % Observations | |||
| Portfolio Combinations | Equal Weighted Portfolio | 25% Equity & 75% debt | 50% Equities & 50% Debt | 75% Equities & 25% Debt |
| Negative Returns | 0% | 0% | 3% | 7% |
| 0% to 6% | 10% | 6% | 13% | 22% |
| 6% to 10% | 24% | 50% | 29% | 17% |
| 10% to 15% | 54% | 37% | 32% | 27% |
| 15% & above | 12% | 7% | 22% | 28% |
Motilal Oswal Private Wealth (MOPW) is a part of Motilal Oswal Group.
Disclaimer: The above content is for informational purposes only, based on an analysis by Motilal Oswal Private Wealth. Readers are advised to consult their financial advisors before investing in any market-linked instrument.
