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

Pure Equity vs. 70:30 Portfolio:

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:

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:

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.