Investment portfolio with 50% Equity: 50% Debt can generate meaningful wealth creation in the long term
An analysis shows that on a pre-tax basis, the Equal Weighted Portfolio has the best risk-reward. 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 per cent Equity: 50 per cent Debt portfolio has the potential to generate meaningful wealth creation in the long term, as demonstrated by the 12 per cent CAGR that this combination has generated over the period of analysis by Motilal Oswal Private Wealth.
Since Equity is an asset class which offers the highest long term compounding return, as expected, the 75 per cent Equity: 25 per cent Debt combination has the highest CAGR at 12.9 per cent, however the underlying volatility is also the highest across all portfolio combinations.
Motilal Oswal Private Wealth has conducted a comprehensive analysis spanning over three decades from 1990 to 2023 (till end September 2023), evaluating the risk-reward from various portfolio combinations. 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.
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 per cent of observations generate higher returns than domestic CPI inflation (6 per cent CAGR).
The 50 per cent Equity: 50 per cent Debt is a well-balanced portfolio for Moderate Risk Profile investors. The return distribution shows a low probability of negative returns with around 54 per cent of observations in the double-digit category.
The 75 per cent Equity: 25 per cent 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.