50 Equity : 50 Debt helps in meaningful wealth creation: Motilal Oswal Wealth

A study by Motilal Oswal Private Wealth showed that a portfolio comprising 50% equity and 50% debt returned 12.2% on a compounded basis in the 1990-2023 period. In comparison, a portfolio with 75% exposure to equities and 25% in debt returned 12.9% during this period, while that with 25% exposure to equity and 75% to debt returned 10.6%, according to the study, based on asset classes including Indian stocks, US stocks, long maturity debt, short maturity debt and gold, all in rupee terms.

The wealth manager said a portfolio equally divided between equity and debt is optimum for investors with a moderate risk profile. The return distribution showed a low probability of negative returns, with around 54% of observations in the double-digit category, it said. The higher the exposure to equities, more is the underlying portfolio volatility (standard deviation).

The study showed an equal-weighted portfolio returned 11.7% in the period under review. An equal-weighted portfolio entails the same allocation to each stock or asset as a proportion of the total investment, ensuring that they all enjoy the same position in the portfolio.

"On a pre-tax basis, the equal-weighted portfolio has the best risk-reward, i.e. compounding return per unit of risk (standard deviation)," said Motilal Oswal Private Wealth. "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."

However, based on a returns distribution analysis using three-year monthly rolling returns, the equally weighted portfolio clearly emerged as a superior alternative to traditional fixed income, it said, since there were no negative returns for a minimum three-year holding period and 90% of observations generated higher returns than domestic inflation based on CPI (6% CAGR).