According to MOSL, a portfolio with 50% debt and 50% equity may provide significant long-term gains

 According to MOSL, a portfolio with 50% debt and 50% equity may provide significant long-term gains

October saw significant pressure on Indian markets, which were down 2.5 percent as increasing bond rates, rising crude oil prices, and ongoing withdrawals of foreign investors compounded the uncertainty surrounding the Israel-Hamas war. Fears of an extended era of high interest rates have also kept investors away from the markets.

In the meanwhile, the indexes have dropped more than 5% each from their September high.

Experts predict that the short-term trend will continue to be unstable, particularly until the geopolitical situation becomes more clear. The long-term outlook for the equities markets is still favorable, however.

Against this background, Motilal Oswal Private Wealth (MOSL), a brokerage business, evaluated the risk-reward from several portfolio combinations via a thorough study that spanned over three decades, from 1990 to 2023 (till the end of September 23).

According to the brokerage, the underlying asset classes for this study include US and Indian equities, gold, long-term and short-term debt, and each is expressed in rupees.

The brokerage advises us which of the three portfolio combinations—25% Equity:75% Debt, 50% Equity:50% Debt, and 75% Equity:25% Debt—to choose based on its research.

Pre-tax, the Equal Weighted Portfolio has the greatest risk-reward ratio, or compounded return per unit of risk (standard deviation), according to the research. The combination's post-tax return would not be as advantageous in the future, however, since all asset classes' capital gains—aside from Indian equity—would be subject to short-term capital gains taxes, the report said.

The 12 percent compound annual growth rate (CAGR) that this combination has produced during the study period gives the brokerage confidence that the 50% Equity:50% Debt portfolio has the ability to create significant wealth development over the long run.

The 75% Equity: 25% Debt combination has the greatest compound annual growth rate (CAGR) at 12.9 percent, which is to be anticipated given that equity is the asset class with the best long-term compounding return. However, it should be noted that this combination also has the most underlying volatility (standard deviation) of any portfolio.

Furthermore, the Equal Weighted Portfolio is a clearly better option than traditional Fixed Income based on a Returns Transmission analysis using 3 year rolling returns (once per month data) as well, as there is no downside risk for a minimum 3 year holding period and 90% of assessments generate higher returns than at home CPI inflation (6 percent CAGR).

The well-balanced 50% Equity: 50% Debt strategy is ideal for investors with a Moderate Risk Profile. It also stated that the return distribution has a low chance of negative returns, with around 54% of observations falling into the double-digit group.

It did, however, add that investors with an aggressive risk profile, who want their portfolio to achieve better compound returns over time while enduring comparatively higher interim volatility, should choose a 75% Equity: 25% Debt allocation.