 "wealth management, family office")
A portfolio comprising 50 per cent equity and 50 per cent debt has the potential to generate meaningful wealth creation in the long-term, according to a study by Motilal Oswal.
The brokerage house said a portfolio equally divided between equity and debt is optimum for investors with a moderate risk profile. Such a portfolio returned a compound annual growth rate (CAGR) of 12.2% over the 1990-2023 period, with a standard deviation of 14.3%, according to the study.
The return distribution shows a low probability of negative returns, with around 54% of observations in the double-digit category, it said.
Motilal Oswal Private Wealth conducted a comprehensive analysis spanning over three decades from 1990 to 2023 (till end Sep’23), evaluating the risk-reward from various portfolio combinations.
The underlying asset classes for the 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 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). 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.
"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," noted the study.
CAGR is for the period 1990 to 30th June 2023. to Equity-IND is represented by Sensex from 1990 to 2002 and Nifty 50 from 2002 onwards; Debt is represented by SBI 1-yr FD rates from 1990 to 2002 and CRISIL Composite bond Index from 2002 onwards; Cash is represented by SBI 3-month FD rates from 1990 to 2002 and CRISIL Liquid fund Index from 2002 onwards; Gold is represented by gold spot price in INR terms. Equity-US is represented by S&P 500 in INR terms.
Source: AceMF; Bloomberg
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).
While the 50% Equity: 50% Debt shows a low probability of negative returns with around 54% of observations in the double-digit category, the 75% Equity: 25% Debt would be suitable for Aggressive Risk Profiles who would prefer their portfolio to generate higher compounding over the long term while being able to tide through relatively higher interim volatility, said the study.
