Debunking the Myth of 100% Equity Portfolios: A 20-Year Analysis
When it comes to investing, many people swear by a 100% equity portfolio, but is this approach always the best? A 20-year analysis by UTI Mutual Fund reveals that while equity may deliver higher returns, it also comes with greater risk. In this article, we’ll explore the impact of adding debt or fixed income to the portfolio and what it means for your risk-adjusted returns.
Debunking the Myth of 100% Equity Portfolios
The comparison uses the Nifty 100 TRI to represent equity and the CRISIL Short Term Bond Fund Index to represent fixed income or debt. The 50:50 portfolio assumes an equal allocation to the two.
Here’s a snapshot of the performance of the three portfolios over different periods:
| Period/CAGR | 100% Equity | 50:50 Balanced | 100% Fixed Income |
|---|---|---|---|
| 1 Year | -3.6% | 1.1% | 5.8% |
| 3 Years | 10.5% | 9.2% | 7.3% |
| 5 Years | 10.5% | 8.7% | 6.4% |
| 10 Years | 12.8% | 10.6% | 7.0% |
| 20 Years | 12.5% | 10.9% | 7.2% |
Why Equity May Not Be the Best Choice
While equity delivered higher absolute returns over longer periods, the short-term picture was different. Over one year, the equity portfolio was down by 3.6%, while the 50:50 portfolio gained 1.1% and fixed income returned 5.8%.
The Impact of Volatility on Returns
Standard deviation measures how widely returns have fluctuated around their average. A higher standard deviation indicates greater volatility, while a lower figure indicates more stable return patterns.
Here’s a snapshot of the standard deviation of the three portfolios over different periods:
| Period/SD | 100% Equity | 50:50 Balanced | 100% Fixed Income |
|---|---|---|---|
| 1 Year | 13.5% | 7.0% | 1.3% |
| 3 Years | 13.6% | 7.4% | 5.5% |
| 5 Years | 14.1% | 7.5% | 4.3% |
| 10 Years | 14.2% | 8.3% | 3.8% |
| 20 Years | 20.9% | 10.3% | 3.2% |
Key Takeaways
- The 50:50 and debt portfolios gave higher risk-adjusted returns than the 100% equity portfolio across every period.
- The data show that the 50:50 and debt portfolios had lower volatility, which meant that the return generated was higher relative to the risk.
- For long-term investors, this comparison highlights why looking at returns alone can give an incomplete picture of performance.
FAQs
What is risk-adjusted return?
Risk-adjusted return is a measure that puts returns and volatility together. It is calculated as the CAGR divided by the annualised standard deviation.
Why is volatility important?
Volatility measures how widely returns have fluctuated around their average. A higher standard deviation indicates greater volatility, while a lower figure indicates more stable return patterns.
What is the best portfolio allocation for me?
The best portfolio allocation for you depends on your individual financial goals, risk tolerance, and time horizon. It’s always a good idea to consult with a SEBI-registered advisor before making any investment decisions.
Conclusion
In conclusion, while a 100% equity portfolio may deliver higher absolute returns over longer periods, it also comes with greater risk. Adding debt or fixed income to the portfolio can help reduce volatility and increase risk-adjusted returns. For long-term investors, this comparison highlights the importance of considering both returns and volatility when evaluating investment options. Always consult with a SEBI-registered advisor before making any investment decisions.
