Adding equity does not always increase portfolio risk: New study compares different debt, equity and gold portfolios
Investors often link equity exposure with higher portfolio risk due to the volatility associated with stock markets. However, historical data suggests that adding equity to a debt portfolio does not always increase volatility. The actual impact depends on the mix of assets and how different asset classes behave together.
Adding equity to debt: Volatility does not always rise
The analysis challenges the common belief that increasing equity allocation automatically makes a portfolio riskier.
The analysis of rolling one-year returns from September 2001 to June 2026 by WhiteOak Capital Mutual Fund shows that adding a measured equity allocation to a debt portfolio can improve returns without necessarily increasing volatility.
| Portfolio composition | Average annual return | Average annual volatility |
| 100% Debt | 6.79% | 6.38% |
| 90% Debt + 10% Equity | 7.99% | 5.76% |
| 80% Debt + 20% Equity | 9.20% | 6.38% |
| 75% Debt + 25% Equity | 9.80% | 7.08% |
| 70% Debt + 30% Equity | 10.40% | 7.95% |
| 50% Debt + 50% Equity | 12.81% | 12.39% |
| 100% Equity | 18.82% | 25.35% |
*Source: WhiteOak Capital MF, Debt (D) is represented by the Crisil 10 Year Gilt Index and Equity (E) by the BSE Sensex TRI. Data represents average 1-year rolling returns on a daily basis and standard deviation (Volatility) of the return from September 2001 to June 2026.
A 100% debt portfolio delivered an average annual return of 6.79% with volatility of 6.38%. However, adding a 10% equity allocation increased the average return to 7.99%, while volatility declined to 5.76%.
Similarly, a portfolio with 80% debt and 20% equity generated an average annual return of 9.20%, while maintaining the same volatility as the 100% debt portfolio.
A 75% debt and 25% equity portfolio delivered an average return of 9.80%, with only a marginal increase in volatility compared with the pure debt portfolio.
At the other end of the spectrum, a 100% equity portfolio generated the highest average annual return of 18.82%, but it also has the highest volatility of 25.35%.
Adding gold as a third asset class
The study also analysed the impact of adding gold to a debt-equity portfolio. Since gold often behaves differently from equity and debt and has a low or negative correlation with these asset classes, it can influence the overall risk-return profile of a portfolio.
| Portfolio composition | Average annual return | Average annual volatility |
| 80% Debt + 20% Gold | 8.59% | 6.21% |
| 70% Debt + 10% Equity + 20% Gold | 9.79% | 5.52% |
| 60% Debt + 20% Equity + 20% Gold | 11.00% | 6.13% |
| 55% Debt + 25% Equity + 20% Gold | 11.60% | 6.84% |
| 45% Debt + 35% Equity + 20% Gold | 12.80% | 8.74% |
| 40% Debt + 40% Equity + 20% Gold | 13.41% | 9.84% |
| 30% Debt + 50% Equity + 20% Gold | 14.61% | 12.21% |
| 20% Debt + 60% Equity + 20% Gold | 15.81% | 14.71% |
| 10% Debt + 70% Equity + 20% Gold | 17.02% | 17.28% |
| 80% Equity + 20% Gold | 18.22% | 19.90% |
*Source: WhiteOak Capital MF, Debt (D) is represented by the Crisil 10 Year Gilt Index, Equity (E) by the BSE Sensex TRI and G is MCX Gold in INR. Data represents average 1-year rolling returns on a daily basis and standard deviation (Volatility) of the return from September 2001 to June 2026.
A portfolio with 55% debt, 25% equity and 20% gold delivered an average annual return of 11.60%, while volatility remained broadly similar to a 100% debt portfolio. Compared with the pure debt portfolio, this combination generated about 3 percentage points higher returns with only a marginal increase in volatility.
Other combinations showed similar trends. A portfolio with 70% debt, 10% equity and 20% gold delivered 9.79% average annual returns with the lowest volatility among the combinations analysed at 5.52%.
The study noted that adding a judicious combination of low, negligible and negatively correlated asset classes can help improve the risk-adjusted return profile of a portfolio.
Among all the combinations, the 10% debt, 70% equity, and 20% gold portfolio generated the highest average annual return of 17.02%. On the other hand, the 70% debt, 10% equity, and 20% gold portfolio recorded the lowest volatility at 5.52%.
Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.
