Crack the Code to Smarter Investing: Unlock Better Risk-Adjusted Returns
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Smarter investing starts with the right strategy, and it helps you crack the code to smarter investing while unlocking better risk-adjusted returns. By diversifying your portfolio with equities, debt, and gold, you can boost returns, minimize risk, and navigate market uncertainties with confidence. Let’s explore how.
1. Adding Equity Doesn’t Always Increase Volatility
🔸 It is a common belief that adding equity to a bond portfolio increases portfolio risk. However, this isn’t always the case.
🔸 Example: A 100% bond portfolio delivered an average return of 7.1% with a volatility of 6.9%. By adding 10% equity, returns improved to 8.1%, while volatility reduced to 6.0%.
🔸 A portfolio with 75% bonds and 25% equity maintained 6.9% volatility but boosted returns to 9.7%, clearly demonstrating improved risk-adjusted returns.
| Portfolio Composition | Average Return (%) | Volatility (%) |
| 100% Debt, 0% Equity | 7.1 | 6.9 |
| 90% Debt, 10% Equity | 8.1 | 6.0 |
| 80% Debt, 20% Equity | 9.2 | 6.3 |
| 75% Debt, 25% Equity | 9.7 | 6.9 |
| 70% Debt, 30% Equity | 10.3 | 7.7 |
| 50% Debt, 50% Equity | 12.6 | 12.2 |
| 0% Debt, 100% Equity | 18.9 | 26.4 |
2. Impact of Adding Gold as a Third Asset Class
🔸 Gold has historically shown a negative correlation with equity and debt, making it a valuable diversifier.
🔸 A portfolio with 55% Debt, 25% Equity, and 20% Gold maintained a similar volatility of 6.9% while boosting returns to 11.1%, a significant improvement from the 7.1% of a pure debt portfolio.
| Portfolio Composition (Equity/Debt/Gold) | Average Return (%) | Volatility (%) |
| 80% Debt, 0% Equity, 20% Gold | 8.4 | 6.5 |
| 70% Debt, 10% Equity, 20% Gold | 9.5 | 5.7 |
| 60% Debt, 20% Equity, 20% Gold | 10.6 | 6.2 |
| 55% Debt, 25% Equity, 20% Gold | 11.1 | 6.9 |
| 40% Debt, 40% Equity, 20% Gold | 12.8 | 9.9 |
| 0% Debt, 80% Equity, 20% Gold | 17.8 | 21.0 |
3. Asset Class Correlations
Different asset classes show unique correlations, which are crucial for building a well-balanced portfolio:
🔸 Indian Equity vs. Gold: -0.53 (strong negative correlation)
🔸 Debt vs. Gold: +0.06 (near zero, meaning they move independently)
🔸 US Equity vs. Indian Equity: +0.40 (moderate positive correlation)
4. Calendar Year-Wise Asset Class Performance
Asset class performance varies yearly. For example:
🔸 In 2020, Nasdaq delivered 48.6%, while Indian Equity returned 16.1%, and Gold surged by 28%.
🔸 In 2022, when Indian Equity grew only by 5.7%, Gold provided a 13.9% return, showcasing its defensive nature during tough equity market phases.
5. Sample Multi-Asset Portfolio Performance (2011-2024)
A hypothetical portfolio with 25% Equity, 45% Debt, 25% Gold, and 5% US Equity delivered a 10.7% CAGR over 13 years, better balancing returns and volatility than any single asset class.
| Financial Year | Indian Equity (BSE Sensex TRI) | Debt (CRISIL Short-Term Bond) | Gold (MCX) | US Equity (S&P 500 INR) | Sample Multi-Asset Portfolio |
| 2011 | 12.5% | 5.1% | 27.4% | 14.7% | 13.0% |
| 2020 | -22.9% | 9.9% | 29.7% | 1.1% | 6.2% |
| 2021 | 69.8% | 7.8% | 7.3% | 51.8% | 25.4% |
| 2024 | 26.5% | 7.6% | 12.5% | 33.5% | 14.8% |
| CAGR (2011-2024) | 12.3% | 7.7% | 10.6% | 18.6% | 10.7% |
This study highlights the importance of combining multiple asset classes such as equity, debt, and gold. By diversifying into non-correlated or negatively correlated assets, investors can reduce volatility and enhance returns. This strategic allocation serves as a robust defense against market uncertainties, ensuring better risk-adjusted performance over time.
The data and insights presented are derived from the report published by WhiteOak Capital Mutual Fund (April 2024). The study analyzes historical returns, volatility, and correlations across various asset classes, including Indian equity, debt, gold, and US equity, over multiple financial years.
The report highlights key portfolio strategies such as multi-asset diversification, optimal portfolio construction, and the impact of varying asset allocations on returns and volatility. These findings underscore the significance of a well-diversified investment approach to balance risk and returns effectively.
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DISCLAIMER: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Brokerage will not exceed the SEBI prescribed limit.
