Beyond the 90-10 Split: A Pragmatic Approach for Indian Retail Investors

Investing is both an art and a science. Striking the right balance between risk and return often determines the success of a portfolio. A widely quoted investment principle recommends allocating 90% to equities and 10% to bonds, emphasizing long-term wealth creation through equities and stability through fixed-income securities. While this approach might work well in developed markets like the U.S., its applicability to Indian retail investors needs careful re-evaluation.

India’s economic dynamics, investment culture, and unique challenges make a one-size-fits-all allocation impractical. After considering factors such as traditional preferences, market volatility, inflation, and global uncertainties, a more balanced approach of 70:30 or even 60:40 between equities and fixed income securities appears optimal for most Indian retail investors. Let us explore this in detail.

Understanding the Indian Context

Investing in India is as much about adapting to global trends as it is about understanding the domestic landscape. Indian retail investors operate in a market shaped by unique cultural and economic factors. Traditional preferences, the evolving financial ecosystem, and local market volatility all play significant roles in shaping investment decisions.

1. Traditional Indian Investment Behavior

Indian investors have traditionally gravitated towards fixed-income instruments like fixed deposits (FDs), recurring deposits, gold, and real estate. Risk aversion and a preference for guaranteed returns have historically shaped this mindset. While equity investing has gained traction in recent years, it remains a smaller part of household portfolios compared to developed economies.

2. Economic and Inflation Dynamics

India’s economic environment is characterized by a mix of opportunities and challenges. The country’s growth story is robust, driven by strong domestic demand, a young population, and structural reforms. However, inflation remains a critical challenge. Persistently high inflation can erode purchasing power, making it essential for investors to achieve inflation-adjusted returns.

Equities have historically been an effective hedge against inflation. Over the long term, stock markets tend to outpace inflation, delivering higher real returns. On the other hand, fixed-income securities provide safety but often fail to keep up with inflation during periods of high price rises. Indian investors, therefore, need to strike a balance between the growth potential of equities and the stability of fixed-income instruments.

3. Indian Market Volatility

The Indian stock market is influenced by multiple factors, including domestic and international developments. High participation from Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) adds liquidity but also increases susceptibility to global shocks. When FIIs and FPIs withdraw funds, markets often experience sharp corrections.

On the other hand, Domestic Institutional Investors (DIIs) like mutual funds and insurance companies have become significant stabilizing forces. Their growing influence helps cushion the impact of FII/FPI outflows. Retail investors should monitor these dynamics to understand capital market trends and position their portfolios accordingly.

4. Global Economic Scenario

The global economy is interconnected, and developments in major markets like the U.S., Europe, and China significantly impact India. Central bank actions, such as the U.S. Federal Reserve’s interest rate policies, affect global liquidity, influencing Foreign Portfolio Investor (FPI) flows into Indian markets.

Geopolitical tensions, such as trade wars, conflicts, or global pandemics, further add to market uncertainties. For example, during the COVID-19 pandemic, Indian markets experienced a sharp sell-off, driven by FPI outflows. However, the subsequent recovery highlighted the resilience of Indian equities. Retail investors need to stay informed about global trends, as these factors can create both risks and opportunities.

Rationale for the Split

Determining the right equity-to-fixed-income ratio is a critical step in building a resilient investment portfolio. For Indian retail investors, this balance must account for the country’s unique economic conditions, market volatility, and the need for both growth and stability.

a. India’s Growth Potential

• India is a high-growth economy with a young population, increasing consumption, and structural reforms. These factors make Indian equities attractive for long-term wealth creation.
• Over the past few decades, Indian equity markets have delivered CAGR of 12-15%, making a strong case for maintaining a higher equity allocation.

b. Inflation and Returns

• Fixed-income instruments like bonds and fixed deposits struggle to beat inflation, especially in a high-inflation economy like India. Equities, on the other hand, provide real inflation-adjusted returns in the long term.

c. Risk Mitigation through Fixed Income

• Indian markets are highly volatile, influenced by factors like Foreign Institutional Investor (FII) flows, geopolitical tensions, and domestic reforms.
• Fixed-income securities act as a stabilizer, reducing portfolio volatility and providing predictable returns.

Factors Influencing Asset Allocation

Asset allocation decisions depend on a combination of personal and external factors. Here’s a closer look at the key considerations:

1. Investor’s Age and Financial Goals

Age and financial goals are fundamental to determining asset allocation. Younger investors, with a longer time horizon, can afford to take on more risk, favoring a 70:30 equity-fixed income split. Middle-aged investors, focused on wealth preservation and moderate growth, benefit from a 60:40 allocation. Retirees or those nearing retirement should prioritize stability and income, often tilting even more towards fixed-income-heavy portfolios.

2. Risk Appetite

Outside your age and financial goals, it’s important to assess your risk tolerance. Risk-averse investors may struggle to stay invested during market downturns, making a higher allocation to fixed-income securities prudent. Conversely, risk-tolerant investors can leverage equities for superior long-term returns.

3. Economic and Market Conditions

The state of the economy and market cycles influence asset performance. Bullish equity markets favor a higher equity allocation, while bearish or uncertain markets warrant caution, with increased fixed-income exposure.

4. Liquidity Needs

Short-term financial requirements necessitate higher liquidity. Fixed-income instruments, like liquid funds or short-term debt funds, ensure easy access to funds without significant capital loss.

Why a 70:30 or 60:40 Allocation is More Suitable for Indian Investors

A 70:30 or 60:40 allocation between equities and fixed-income securities offers Indian retail investors a balanced strategy to achieve their financial goals by combining growth potential with stability. Equities drive long-term wealth creation by leveraging economic growth and delivering inflation-beating returns. Fixed-income securities, on the other hand, provide predictable income and act as a stabilizer during market downturns, reducing overall portfolio risk.

a. Mitigating Risk While Ensuring Growth

A 70:30 allocation allows investors to capitalize on equities’ growth potential while mitigating risks through fixed-income instruments like bonds and debt mutual funds. These provide stability, ensuring that investors are not forced to sell equity holdings during adverse market conditions. For risk-averse or nearing-retirement investors, a 60:40 allocation further lowers portfolio risk while maintaining opportunities for steady growth.

b. Diversification Benefits

Diversification balances risk and reward by spreading investments across asset classes. While equities offer growth opportunities by leveraging economic cycles, fixed-income securities provide a counterbalance during equity market downturns. Expanding diversification to include international equities or alternative investments, such as global funds, can further enhance portfolio resilience and reduce exposure to domestic market-specific risks.

c. Addressing Indian Market Volatility

Indian markets experience high volatility due to global economic shifts, FII activity, and domestic policy changes. A 70:30 or 60:40 allocation reduces the impact of these fluctuations by blending growth assets with stabilizing fixed-income instruments. This approach ensures consistent performance and helps investors maintain confidence even during uncertain times.

By balancing equities and fixed income thoughtfully, Indian retail investors can craft a portfolio that aligns with their risk appetite, financial goals, and the dynamic nature of the Indian market.

Suggested Splits Based on Investor Profiles

Not all investors are the same, and their ideal asset allocation depends on factors like age, risk appetite, and financial goals. From aggressive to conservative investors, each group requires a unique balance between equities and fixed income to achieve their objectives.

Aggressive Investors (Young, High Risk Appetite):

Recommended Split: 70:30 (Equity: Fixed Income)

• Ideal for investors in their 20s or 30s with a long investment horizon.
• Higher exposure to equities allows them to maximize growth, while a smaller fixed-income allocation provides some stability.

Balanced Investors (Middle-Aged, Moderate Risk Appetite):

Recommended Split: 70:30 or 60:40 (Equity: Fixed Income)

• Suitable for investors in their 40s or early 50s who are balancing growth with preservation.
• The fixed-income component cushions against market volatility, ensuring steadier portfolio performance.

Conservative Investors (Near or Post-Retirement):

Recommended Split: 40:60 or 30:70 (Equity: Fixed Income)

• Retirees or those nearing retirement need to prioritize capital preservation and regular income over growth.
• Fixed-income securities like bonds, debt mutual funds, and senior citizen schemes provide stability and predictable returns.

Steps to take for Indian Retail Investors

Making informed investment decisions requires a structured approach. Here are the actionable steps:

1. Determine Your Risk Profile

Your risk profile is shaped by factors such as age, income stability, financial goals, and investment horizon. Tools like risk profiling questionnaires or consultations with financial advisors can help assess your tolerance for risk. Being clear about your comfort level with market fluctuations is the first step in crafting a suitable allocation strategy.

2. Build a Diversified Equity Portfolio

Equities are the growth engine of any portfolio. Diversification within equities minimizes risks associated with specific sectors or companies:

• Large-Cap Funds: Offer stability and consistent returns.
• Mid-Cap and Small-Cap Funds: Provide higher growth potential but with increased risk.
• Index Funds/ETFs: Low-cost options that track major indices like the Nifty 50 or Sensex.

3. Choose Fixed-Income Securities Wisely

Fixed-income investments form the safety net of your portfolio. Options include:

• Government Securities: G-secs are risk-free instruments offering steady returns.
• Debt Mutual Funds: Diversified exposure to corporate bonds and other fixed-income instruments.
• Liquid Funds: Ideal for short-term parking of funds.
• Corporate Bonds: Provide higher yields than government bonds, rated by credit agencies to reflect risk levels. Corporate bonds are ideal for investors seeking moderate risk with better returns than bank FDs.
• Bank Fixed Deposits (FDs): Offer guaranteed returns with minimal risk and flexible tenure options, insured up to ₹5 lakh under DICGC.
• Corporate Fixed Deposits (FDs): Higher interest rates than bank FDs but with slightly more risk, suitable for moderate-risk investors seeking better returns.

4. Rebalance Periodically

Rebalancing helps maintain your portfolio’s target allocation by addressing imbalances caused by market movements. For instance, after an equity rally, shifting funds to fixed-income securities can restore balance. This practice enforces disciplined investing, encouraging you to buy low and sell high.

In bull markets, reallocating gains towards fixed income locks in profits, while during bearish or uncertain markets, increasing equity allocation through SIPs helps average costs and positions the portfolio for future growth. Staying informed about economic conditions, interest rates, and global trends ensures portfolio resilience.

5. Seek Professional Guidance

If you’re unsure about creating the right asset allocation or rebalancing strategy, consulting a certified financial planner (CFP) or investment advisor can be invaluable. Professional advice can help tailor your portfolio to your specific needs and ensure it aligns with changing market dynamics.

6. Start Systematic Investment Plans (SIPs)

SIPs offer a disciplined approach to investing in equities and mutual funds. By investing regularly, you can benefit from rupee cost averaging, which reduces the impact of market volatility and helps build wealth over time.

7. Stay Updated on Market Trends

Keep an eye on economic indicators, interest rates, inflation trends, and global developments. Staying informed ensures you make proactive adjustments rather than reactive changes to your portfolio.

Special Considerations for Indian Investors

India’s unique investment landscape demands a tailored approach. Factors such as traditional investment preferences, high inflation, and evolving financial instruments influence asset allocation decisions. By factoring in these considerations, Indian investors can build resilient portfolios suited to their needs.

a. Tax Implications

Tax efficiency plays a significant role in determining investment returns. Long-term capital gains (LTCG) on equities are taxed at 12.5% beyond ₹1.25 lakh, while short-term capital gains (STCG) are taxed at 20%. Fixed-income instruments, like bonds and fixed deposits, are taxed based on the investor’s income slab. Understanding these implications helps optimize net returns.

b. Rising Popularity of Alternative Investments

Alternative investment options, such as REITs (Real Estate Investment Trusts) and INVITs (Infrastructure Investment Trusts), are gaining traction. These instruments offer diversification benefits, regular income, and exposure to sectors like real estate and infrastructure. Including a small allocation to these assets can enhance portfolio stability.

c. Behavioral Biases

Indian investors often exhibit behavioral biases such as overconfidence during bull markets or panic selling during downturns. Adopting a long-term view and avoiding impulsive decisions can help mitigate these biases and improve portfolio performance.

d. Emerging Investment Platforms

Digital platforms and robo-advisors have made investing more accessible. These tools offer algorithm-based portfolio suggestions tailored to an investor’s risk profile and goals. Leveraging technology simplifies the investment process and ensures data-driven decisions.

Conclusion

Striking the right equity-fixed income allocation is essential for Indian retail investors aiming for long-term wealth creation and financial stability. While principles like the 90:10 rule provide a baseline, individual factors such as risk tolerance, financial goals, and market dynamics must shape the final allocation.

India’s dynamic environment, marked by domestic growth, global trends, inflation, and market volatility, demands a thoughtful investment strategy. For many, a balanced allocation of 70:30 or 60:40 between equities and fixed income offers an optimal mix of growth and stability, with adjustments based on age, income, and economic scenarios.

A disciplined, well-informed approach—focused on diversification, risk-return balance, regular rebalancing, and an understanding of the Indian market—can help investors confidently navigate complexities and achieve financial goals.