A 25-year study by WhiteOak Capital reveals that adding a small 10-20% equity slice to debt-heavy portfolios can improve returns and lower volatility. This challenges the common belief that increasing equity always makes a portfolio riskier.
Many Indian investors traditionally view debt instruments as the safe choice and equities as inherently risky. However, a 25-year study released by WhiteOak Capital Mutual Fund, covering daily market data from September 2001 to 2026, suggests that a rigid approach to asset allocation might be counterproductive.
The findings show that adding a small portion of equity to a debt-heavy portfolio does not necessarily increase risk and may actually make the portfolio more stable. For example, a portfolio invested entirely in debt returned an average of 6.77% with a volatility level of 6.37%. When the portfolio was adjusted to hold 90% debt and 10% equity, the average return rose to 7.97%, while the volatility—a measure of price swings—actually dropped to 5.76%.
Even with a 20% equity allocation (80% debt and 20% equity), the average return jumped to 9.17%. Interestingly, the volatility in this scenario remained at 6.39%, which is nearly the same as the 100% debt portfolio. This suggests that the risk was not significantly higher, but the returns were better.
Diversification often includes gold as well. The study found that including a fixed 20% allocation to gold alongside debt and equity helped smooth out the returns even further. A portfolio split between 70% debt, 10% equity, and 20% gold delivered an average return of 9.80% with significantly lower volatility at 5.51%.
The primary reason for these results is the low correlation between asset classes. Equity, debt, and gold do not always move in the same direction at the same time. When one asset class is struggling, another may remain steady or perform well, helping to balance the overall portfolio performance.
While these figures are based on historical performance, investors should keep a few critical risks in mind. Past performance is not a guarantee of future returns. Market conditions change, and a strategy that worked over the last 25 years may not perform the same way in the future. Additionally, maintaining these specific allocations requires regular rebalancing, which can lead to tax implications and transaction costs. The debt portion of any portfolio also carries interest rate risk, where bond prices may fall if interest rates rise. Investors should look at their total asset allocation and risk tolerance rather than focusing solely on individual assets.