Seeking portfolio balance? Motilal Oswal Private Wealth recommends 50:50 equity-debt mix

Investors often grapple with right asset allocation for their portfolios that withstands various market cycles. Motilal Oswal Private Wealth has recently conducted a comprehensive analysis spanning over three decades from 1990 to 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 rupee terms.

The portfolio combinations include an equal weighted portfolio across all the above 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, that is 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,” Motilal Oswal Private Wealth said.

A 50:50 equity-debt portfolio is said to have the potential to generate meaningful wealth creation in the long term, as the analysis demonstrated a 12% CAGR for this combination.

Since equity is an asset class, which offers the highest long-term compounding return, as expected, the 75-25% debt combination has the highest CAGR at 12.9%. However, the underlying volatility (standard deviation) is also the highest across all portfolio combinations.Based on a returns distribution analysis using 3-year rolling returns (monthly data), the equal weighted portfolio emerged 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).

Based on the above analysis, the investment management firm said 50:50 equity-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.

Meanwhile, 75-25% equity-debt is proposed to be suitable for aggressive investors who would prefer their portfolio to generate higher compounding over the long term while being able to tide through relatively higher interim volatility.

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