Portfolio optimisation: Experts recommend over 50% investment in equities; how much should you allocate to gold, debt?

After the initial turbulence sparked by the tightly contested Lok Sabha election, the Indian market has staged an impressive recovery over the past three sessions. Surging by a remarkable 6 percent during this period, the benchmark indices exhibited resilience and regained lost ground.

Today's surge, particularly noteworthy, saw indices climbing by nearly 2 percent. This remarkable rebound coincided with the Reserve Bank of India's optimistic revision of the FY25 GDP growth forecast to 7.2 percent, up from the previous 7 percent projection. Furthermore, the central bank maintained a steady course by leaving the repo rate unchanged at 6.5 percent for the eighth consecutive time, signaling stability and confidence in economic prospects.

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The sharp 6 percent decline in the Indian market in a single day has understandably rattled many retail investors, particularly those with limited experience. To shield against such market swings and sudden downturns, experts advocate a diversified portfolio comprising various asset classes, including gold, fixed income, and equities.

Despite the chaos triggered by the election results, most experts maintain a bullish outlook on equities, emphasising their potential for robust returns. They advise allocating at least 50 percent of one's portfolio to equities, underscoring their enduring appeal. Additionally, they suggest dedicating approximately 10-35 percent of the portfolio to gold and 15-25 percent to fixed income, tailored to individual risk appetites. This balanced approach aims to mitigate risks and optimise returns amidst market volatility.

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Let's take a look at what the market experts recommend:

Shashank Pal, Chief Business Officer, PL Wealth Management

Indians usually have a weakness for gold due to its ability to protect the purchasing power of the rupee besides inflation hedging and emotional reasons. Fixed income products and bank deposits are a staple for them while not realising two things, one, that it doesn’t always beat inflation and secondly, that it can possibly carry interest rate risk and credit risk. Considering the current local and global geopolitical and economic scenario, one can have an asset allocation mix of gold, fixed income, and equities in the ratio of 5–10 percent, 15-25 percent, and 65-80 percent, respectively. The equity allocation should be in multiple tranches, most probably over the next 1.5 to 2.5 years considering the long term. (i.e. more than 7 years).

Axis Securities

Equity markets are currently priced for perfection. The NDA has earned a third term for itself, but we are now in a regime where coalition politics is back in play. That could mean investors might be looking to rotate into largecaps relative to mid- and smallcaps, given the challenges of satisfying alliance partners. Speaking of gold, the metal has been a great beneficiary of the softness in the dollar, given how much inflation in the US has come off. Historically, looking at 25 years of data, gold has averaged a 4.5 percent return in the seven months starting in June, rising in 19 out of 25 years. 

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So yes, both fundamentally and price-wise, based on history, there is a reason to have a decent allocation to gold (we would say about 25 percent). Domestic fixed income is in a sweet spot. We believe the RBI will not move lower before the Fed does, so a rate cut may not happen until the US central bank moves lower first, but the macros are surely pointing in the right direction, notwithstanding a geopolitical shock. Therefore, a 25 percent allocation to short-term or medium-maturity bills will make sense.

Rahul Ghose, CEO of Hedged.in

I would still allocate 50 percent to equity and options structures. If someone already has a portfolio, he might want to keep some long-term hedges on the portfolio as well for the next 6-9 months. FY25 might not be as robust as FY24. But nonetheless, it is safe to say that the long-term story still remains intact. We can still expect a max of 24,300 on the upside on the Nifty this year. For the rest 35 percent one should look to put in a mixture of gold and silver and not just gold and the balance in debt instruments.

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Deepak Jasani, Head of Retail Research at HDFC Securities

A lot would depend on the age and risk appetite of the investor. Having said that, an allocation of 10:35:55 in gold, fixed income, and equities, respectively, would be ideal for a medium risk appetite investor of 40-45 years of age. However, on a long-term basis, an allocation of 10:30:60 would be ideal for a medium-risk appetite investor of 40-45 years of age.

Chirag Muni, Executive Director, Anand Rathi Wealth Limited

Investors are advised to diversify their investments across asset classes. An ideal allocation is 80 percent equity and 20 percent debt, whereby equity and debt will contribute stability to portfolio performance. With this allocation, investors can expect long-term returns of 12 percent.

Investors should explore gold only if they have some long-term commitment towards the asset class, such as accumulating gold for marriage or any other personal reasons. Investors desiring to allocate funds to gold should limit their contribution range up to 5 to 10 percent of their overall portfolio. The optimal avenue for investing in gold is sovereign gold bonds (SGBs), as they offer underlying asset appreciation and an additional annual interest coupon of 2.5 percent.

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For short-term investments with a timeline of less than one year, it is advisable to invest in debt funds. These funds typically offer stable returns with lower volatility.

Vaibhav Jain, Head of Content & Education, Share.Market

Asset allocation should be the holy grail for all individuals from a long-term perspective. Strategic asset allocation must depend on the investor's personal risk profile and goals. However, one can also tweak their allocations to capitalise on temporary/short-term events. This is called tactical asset allocation. For a medium-risk investor, with not many liabilities, from a 10-15 years perspective, they should look to have around 50-60 percent in equities, 20-30 percent in fixed income, and 5-10 percent in gold.

Yogesh Kalwani, Head - Investments, InCred Wealth

Returns from equity as an asset class should be moderate after strong performance in the last 2 years. We have revised our stance on equities to Neutral from Positive. Preference for largecaps and quality midcaps in equity. We do believe over a 3-year holding period, equity will provide superior returns. Investors with a balanced risk profile should consider 50 percent equity, 30 percent fixed income, 15 percent alternate investment, and 5 percent gold. Fixed income investments are essential to provide portfolio stability.

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In the midst of changing market conditions, the consensus among experts underscores the importance of a balanced approach to asset allocation. While equities remain a cornerstone of many portfolios, considerations for diversification into gold and fixed income are gaining prominence. With varying risk profiles and investment horizons, individuals are advised to tailor their allocations to align with personal goals and market outlooks, leveraging strategic and tactical asset allocation strategies for long-term wealth preservation and growth.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.