The Indian markets have been under pressure in October, down 2.5 percent as ucertainties from the Israel-Hamas conflict along with rising bond yields and crude oil prices, and continued foreign investor outflows continue to weigh. Investors concerned about a longer period of high rates have also kept the markets on the sidelines.
Meanwhile, from their peaks hit in September, the indices have lost over 5 percent each.
Experts believe that the near-term trend will remain volatile especially till some clarity emerges on the geopolitical situation. However, the long-term prospects of equity markets remain positive.
In this backdrop, brokerage house Motilal Oswal Private Wealth (MOSL) 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 brokerage informed that the underlying asset classes for this analysis include Indian Equity, US Equity, Long Maturity Debt, Short Maturity Debt and Gold, all in rupee terms.
Amid the three portfolio combinations – 25% Equity:75% Debt, 50% Equity:50% Debt, and 75% Equity:25% Debt, the brokerage tells us, as per its analysis, which one should you pick.
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, it said.
The brokerage believes that the 50% Equity:50% Debt portfolio has the potential to generate meaningful wealth creation in the long term, as demonstrated by the 12 percent CAGR that this combination has generated over the period of analysis.
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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 percent, however the underlying volatility (standard deviation) is also the highest across all portfolio combinations, it noted.
Moreover, based on a Returns Distribution analysis using 3 year rolling returns (monthly data) as well, 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 percent of observations generate higher returns than domestic CPI inflation (6 percent CAGR).
The 50% Equity: 50% Debt is a well-balanced portfolio for Moderate Risk Profile investors. The return distribution shows a low probability of negative returns with around 54 percent of observations in the double-digit category, it added.
However, it further noted that the 75% Equity: 25% 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.
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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 30 Oct 2023, 04:22 PM IST