Despite knowing that equities can outperform all other asset classes in the long run, we do not invest all of our money in equities. There are three reasons for this.
One: Equity is the most volatile asset class, and not all of us are comfortable with volatility.
Two: It may be the best-performing asset class over the long term, but not all our goals are long-term. We do need money in the short term; some goals are perhaps three to five years away, and we definitely need some liquid cash for emergencies. And so, what if equity markets are down in the dumps when we need our money the most?
Three: Diversification helps; when one asset class is down, another is up, and your overall portfolio becomes more consistent.
Therefore, this begs the question:
Related stories
- MC Inside Edge: Operators lighten up on Cummins, structured deals under strain, algo prop firms nerv...
- Eight key financial changes you need to bear in mind this June
- RBI brings home 100 tonnes of gold from UK: Report
Which is the best asset allocation?
Moneycontrol Personal Finance ran some numbers. We took the Nifty 500 Total Return Index (TRI) to represent equity, the CRISIL Composite Bond Index as a proxy for fixed-income returns, and the Nippon India ETF (Exchange-Traded Fund) Gold BeES for gold. We took seven different asset allocations and chartered their year-on-year (YoY) performance from 2013 to 2023, as well as their three-year, five-year, and 10-year returns.
Asset allocation #1 (Globally recognised and most followed)
Equity: 60%
Debt: 40%
Asset allocation #2 (Equity-tilted; adding a touch of gold)
Equity: 70%
Debt: 20%
Gold: 10%
Asset allocation #3 (Equity-oriented; adding a touch of gold)
Equity: 60%
Debt: 30%
Gold: 10%
Asset allocation #4 (Balanced allocation)
Equity: 50%
Debt: 40%
Gold: 10%
Asset allocation #5 (Balanced allocation)
Equity: 50%
Debt: 30%
Gold: 20%
Asset allocation #6 (Equal weight)
Equity: 34%
Debt: 33%
Gold: 33%
Asset allocation #7 (Fixed income; a touch of gold and equity)
Equity: 20%
Debt: 60%
Gold: 20%
Five key takeaways
Is the age of 60-40 over?
The 60:40 (equity-debt) asset allocation is universally accepted as the most basic allocation and has been widely popular for decades. And over the years, it worked well. Between 2013 and 2017, it was one of the best performers annually, except for 2016, when equity markets didn’t do well (Nifty 500 index, the benchmark, gave a return of just 5 percent that year).
Also Read:Mutual Funds Year-end Special 2023: 5 things that impacted how you invested in 2023
This trend is more visible if you take the five-year returns of the asset allocation buckets. Over a five-year period, the 60-40 allocation did exceedingly well, if you look at the performance taken as of the end of 2015 up until 2019. From 2020 onwards, the magic of 60-40 has waned.
A touch of gold helps
By just adding a bit of gold to your portfolio, say 10–20 percent, your portfolio can deliver better returns. Thanks to strong equity performance in 2021 and 2023 and also gold’s run in 2023, the 70-20-10 (equity-debt-gold) combination has topped the charts. Even the 50-30-20 combination has done reasonably well since 2020.
On a five-year return basis, calculated at the end of 2020 until 2023, the 70-20-10 combination has given the best return.
Equal weight is the most volatile
On a YoY basis, an equal weight combination (34-33-33) is the most volatile. From a loss of 1.8 percent in 2013 to a 15.8 percent return in 2023, this combination gets impacted when any one of its asset classes goes down. Its long-term return has been steadier and not that bad. Between 2013 and 2023, its average five-year return has been 9.8 percent. On account of its passive nature (no matter what, the asset allocation distributes your money equally among all asset classes), its long-term return is one of the lowest.
Also see:This debt fund is a winner, and not just when interest rates start to fall. Here’s why
Asset allocation is important
Where to invest now?Note that the Nifty 500 index has fallen sharply after years in which it has given a good return. In 2014, the Nifty 500 TRI gave a return of 39.30 percent; it fell in 2015 (0.22 percent return). In 2017, it gave a return of 37.78 percent return; it fell in 2018 (a loss of 2.13 percent). In 2023, the Nifty 500 TRI gave a return of 27 percent. Going by anecdotal evidence, it’s best to now adopt an asset allocation strategy to diversify across asset classes and have a comparatively more balanced portfolio.
Don’t go by returns; asset allocation is the key
Is there a best asset allocation? The answer is a resounding ‘NO’. Here’s why.
In the year 2023, the combination with the least amount of equity (20-60-20) gave a return of 12.3 percent. That’s way more than fixed deposits. In 2018, when equity markets were down (the S&P BSE Sensex gave a return of 5.9 percent and the Nifty 500 TRI lost 2.13 percent), the 20-60-20 option gave the best return of all combinations: 4.5 percent. The worst performer that year was 70-20-10).
Where to invest?
If you are a moderate-risk investor, it’s best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification.
If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
Click here: List of MC30 mutual fund schemes
