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HomeMutual FundsPure Equity Investing vs asset allocation

Pure Equity Investing vs asset allocation

It may be difficult to navigate the complicated world of investing, much like navigating unfamiliar territory. Of all the choices that investors have to make, choosing between a diversified and a concentrated stock portfolio may be the most important. To determine the real effect of diversity on returns and risk management, we examine the performance of many portfolios over 20 years in this investigation.

Considerations:

  • Pure equity returns are taken from Nifty 50 TRI, where it has yielded a CAGR of 13.18% in the last 20 years as of February 22, 2024.
  • For the debt portion, we have considered the India 10-Year Bond Yield, which has a current yield of 7.052% as of February 22, 2024.
  • We assumed yearly SIPs of Rs 10,000 in both these portfolios for the last 20 years and took the actual market scenario between February 22, 2004 and February 22, 2024.

Portfolios Under Scrutiny

Our analysis encompasses four distinct investment strategies:

  • Pure Equity Portfolio: This portfolio embraces the allure of equities, focusing solely on the Nifty 50 Total Returns Index (TRI).
  • 70:30 Portfolio (Equity: Debt): Balancing risk and reward, this portfolio allocates 70% to equities (Nifty 50 TRI) and 30% to debt (India 10-Year Bond Yield).
  • 80:20 Portfolio (Equity: Debt): Striking a nuanced balance, this portfolio tilts towards equities with an 80% allocation, while reserving 20% for debt instruments.
  • 60:40 Portfolio (Equity: Debt): Exuding conservatism, this portfolio holds a majority in debt (60%) supplemented by a 40% equity exposure.

Insights Unveiled

Our rigorous analysis unfolds compelling insights into each portfolio’s performance:

Pure Equity

Year Pure Equity Investment Total Value
2004 10000 Rs 11318.00
2005 21318 Rs 24127.71
2006 34128 Rs 38625.74
2007 48626 Rs 55034.62
2008 65035 Rs 73606.18
2009 83606 Rs 94625.48
2010 104625 Rs 118415.11
2011 128415 Rs 145340.22
2012 155340 Rs 175814.07
2013 185814 Rs 210304.36
2014 220304 Rs 249340.48
2015 259340 Rs 293521.55
2016 303522 Rs 343525.69
2017 353526 Rs 400120.38
2018 410120 Rs 464174.24
2019 474174 Rs 536670.41
2020 546670 Rs 618721.57
2021 628722 Rs 711587.07
2022 721587 Rs 816692.24
2023 826692 Rs 935650.28

 

Pure Equity vs. 70:30 Portfolio:

Year Equity (70%) Investment Debt (30%) Investment Equity Value Debt Value Total Value
2004 7000 3000 7923 3212 Rs 11134.16
2005 14923 6212 16889 6212 Rs 23100.96
2006 23889 9212 27038 9212 Rs 36249.58
2007 34038 12212 38524 12212 Rs 50735.79
2008 45524 15212 51524 15212 Rs 66735.89
2009 58524 18212 66238 18212 Rs 84449.39
2010 73238 21212 82891 21212 Rs 104102.14
2011 89891 24212 101738 24212 Rs 125949.72
2012 108738 27212 123070 27212 Rs 150281.41
2013 130070 30212 147213 30212 Rs 177424.61
2014 154213 33212 174538 33212 Rs 207749.89
2015 181538 36212 205465 36212 Rs 241676.64
2016 212465 39212 240468 39212 Rs 279679.54
2017 247468 42212 280084 42212 Rs 322295.82
2018 287084 45212 324922 45212 Rs 370133.53
2019 331922 48212 375669 48212 Rs 423880.84
2020 382669 51212 433105 51212 Rs 484316.66
2021 440105 54212 498111 54212 Rs 552322.51
2022 505111 57212 571685 57212 Rs 628896.13
2023 578685 60212 654955 60212 Rs 715166.76

 

When it comes to final returns, the pure stock portfolio comes out on top. Nonetheless, the 70:30 portfolio has impressive resilience in times of market turbulence, demonstrating better risk management skills and downside protection.

Pure Equity vs. 80:20 Portfolio:

Year Equity (80%) Investment Debt (20%) Investment Equity Value Debt Value Total Value
2004 7000 3000 7923 3212 Rs 11134.16
2005 15923 5212 18021 5212 Rs 23232.76
2006 26021 7212 29451 7212 Rs 36662.35
2007 37451 9212 42387 9212 Rs 51598.37
2008 50387 11212 57028 11212 Rs 68239.35
2009 65028 13212 73598 13212 Rs 86810.01
2010 81598 15212 92353 15212 Rs 107564.69
2011 100353 17212 113580 17212 Rs 130791.23
2012 121580 19212 137604 19212 Rs 156815.43
2013 145604 21212 164794 21212 Rs 186006.02
2014 172794 23212 195569 23212 Rs 218780.33
2015 203569 25212 230399 25212 Rs 255610.69
2016 238399 27212 269820 27212 Rs 297031.70
2017 277820 29212 314437 29212 Rs 343648.39
2018 322437 31212 364934 31212 Rs 396145.57
2019 372934 33212 422087 33212 Rs 455298.27
2020 430087 35212 486772 35212 Rs 521983.70
2021 494772 37212 559983 37212 Rs 597194.66
2022 567983 39212 642843 39212 Rs 682054.84
2023 650843 41212 736624 41212 Rs 777835.98

 

Like its 70:30 sibling, the 80:20 portfolio protects investors from market volatility while yielding somewhat lower overall returns. This emphasizes the significant influence that even a small amount of debt may have on risk reduction.

Pure Equity vs. 60:40 Portfolio:

Year Equity (70%) Investment Debt (30%) Investment Equity Value Debt Value Total  Value
2004 7000 3000 7923 3212 Rs 11134.16
2005 13923 7212 15758 7212 Rs 22969.16
2006 21758 11212 24625 11212 Rs 35836.81
2007 30625 15212 34662 15212 Rs 49873.22
2008 40662 19212 46021 19212 Rs 65232.42
2009 52021 23212 58877 23212 Rs 82088.77
2010 64877 27212 73428 27212 Rs 100639.59
2011 79428 31212 89897 31212 Rs 121108.21
2012 95897 35212 108536 35212 Rs 143747.38
2013 114536 39212 129632 39212 Rs 168843.21
2014 135632 43212 153508 43212 Rs 196719.46
2015 159508 47212 180531 47212 Rs 227742.60
2016 186531 51212 211116 51212 Rs 262327.39
2017 217116 55212 245732 55212 Rs 300943.25
2018 251732 59212 284910 59212 Rs 344121.49
2019 290910 63212 329252 63212 Rs 392463.42
2020 335252 67212 379438 67212 Rs 446649.62
2021 385438 71212 436239 71212 Rs 507450.35
2022 442239 75212 500526 75212 Rs 575737.42
2023 506526 79212 573286 79212 Rs 652497.53

 

Adopting a cautious approach, the 60:40 portfolio has the lowest returns but provides protection protection against market downturns. Designed for conservative investors who value capital preservation above all else, this portfolio emphasizes stability over high returns.

Diversification is a ray of stability and resilience amidst the maze of investing techniques. The diversified equivalents of pure stock portfolios shine with their ability to withstand market storms, while the former dazzle with their potential for enormous returns. Therefore, diversity turns out to be the signpost of sound financial judgment and prosperity for investors who are looking for a fine balance between rewards and risk reduction.

Pure Equity: Unleashing Growth Potential

Composed solely of stocks, these funds directly participate in the stock market’s ups and downs.

Advantages

  • Over the long term, equities have historically outperformed other asset classes, offering the chance for substantial wealth creation.
  • Reinvesting earnings fuels rapid growth through the power of compounding.
  • Access a diverse range of companies across sectors, industries, and market capitalizations.

Disadvantages

  • Be prepared for significant fluctuations in value, especially during market downturns, which can be emotionally challenging for some investors.
  • Pure equity requires a longer investment timeframe (7+ years) to ride out market cycles and maximize returns.
  • If you have a low tolerance for potential losses, pure equity might not be the best fit.

Asset Allocation: Diversification is Key

Blends stocks, bonds, and other asset classes, aiming to balance risk and return based on your investment goals and risk profile.

Advantages

  • The presence of less volatile assets like bonds helps cushion the blow during market downturns, providing peace of mind and potentially minimizing losses.
  • With customisable allocations, you can tailor the risk-return profile to your needs, whether you are risk-averse or seeking moderate growth.
  • While not guaranteeing growth, asset allocation can offer relatively stable returns over time.

Disadvantages

  • Diversification comes at the cost of potentially lower returns compared to pure equity, especially over the long term.
  • Rebalancing allocations periodically might be necessary to maintain your desired risk-return profile.
  • Understanding the intricacies of different asset classes and their interactions can be challenging for some investors.

Key Takeaways

  1. Pure equity boasts higher return potential but carries greater risk and volatility.
  2. Asset allocation offers lower volatility and stability but potentially lower returns.
  3. There’s no “one-size-fits-all” answer. Carefully assess your age, risk tolerance, and goals to make an informed decision.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.
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