6.76% vs 11.59%: What adding equity and gold did to portfolio returns

WhiteOak Capital Mutual Fund's "Chemistry of Investing" study examines how combinations of debt, equity and gold have historically influenced portfolio risk and return outcomes.

Adding a small amount of equity to a debt-heavy portfolio does not necessarily increase volatility, while introducing gold can further change the risk-return profile, according to a WhiteOak Capital Mutual Fund study. Here is what investors can learn from the analysis.

 

For investors, the usual rule of thumb is simple: equity means higher risk, while debt means lower risk.

 

But what happens when the two are combined?

 

And what happens when a third asset class such as gold is added?

 

A study by WhiteOak Capital Mutual Fund, titled “Chemistry of Investing”, examines these questions using historical rolling one-year return data for combinations of debt, equity and gold. The analysis looks at the period from September 2001 to April 2026 and measures both average returns and volatility.

 

 

The study does not constitute an investment recommendation. Instead, it illustrates how combining assets with different return and volatility characteristics can change the risk-return profile of an overall portfolio. 

D = Debt (Crisil 10 Year Gilt Index), E = Equity (BSE Sensex TRI). Source: MFIE, Bloomberg and Internal Research of WhiteOak Capital. ^Average 1 Year rolling return on daily basis and Standard Deviation (Volatility) of the return for various combinat

 

Adding equity did not always increase volatility

 

The first finding may appear counter-intuitive.

 

WhiteOak compared portfolios ranging from 100% debt to 100% equity, using the CRISIL 10 Year Gilt Index as the debt proxy and the BSE Sensex TRI as the equity proxy.

 

According to the study, a portfolio consisting entirely of debt generated an average one-year rolling return of 6.76%, with volatility of 6.37%.

 

When 10% equity was added and the debt allocation reduced to 90%, the average return rose to 7.95%, while volatility actually fell to 5.76%.

 

In other words, in this historical dataset, moving from 100% debt to 90% debt and 10% equity did not result in higher volatility.

 

The study attributes this to the behaviour and relationship between different asset classes. The return of a portfolio depends not only on the risk of individual assets but also on how those assets move relative to one another.

 

What happened with a 20% equity allocation?

 

The study's 80% debt and 20% equity portfolio had an average one-year rolling return of 9.14%, compared with 6.76% for the 100% debt portfolio.

 

Its volatility was 6.39%, almost identical to the 6.37% volatility recorded for the 100% debt portfolio.

 

That means the historical difference was:

 

• 100% debt: 6.76% average return and 6.37% volatility
• 90% debt + 10% equity: 7.95% average return and 5.76% volatility
• 80% debt + 20% equity: 9.14% average return and 6.39% volatility

 

WhiteOak's analysis therefore illustrates that adding equity to a debt portfolio does not mechanically translate into a proportional increase in portfolio volatility.

 

However, investors should not interpret this as meaning equity is inherently less risky than debt. The finding relates to the combined portfolio, the historical period studied and the specific indices used.

 

What happens as equity allocation rises?

 

The relationship changes as the equity allocation becomes larger.

 

According to WhiteOak's data, the portfolio with 70% debt and 30% equity generated an average one-year rolling return of 10.33%, with volatility of 7.97%.

 

At a 50:50 allocation between debt and equity, the average return rose to 12.71%, while volatility increased to 12.40%.

 

At 100% equity, the average return was 18.66%, but volatility climbed to 25.34%.

 

So the broader message is not that equity increases returns without increasing risk.

 

Rather, the historical data shows that the relationship between asset allocation and portfolio volatility is not necessarily linear.

 

A small allocation to an asset with different return characteristics can alter the behaviour of the overall portfolio.

 

As the equity allocation becomes larger, however, equity's higher volatility increasingly influences the portfolio.

 

Why does diversification change the picture?

 

The reason lies partly in correlation.

 

Two assets do not necessarily rise and fall at the same time or by the same magnitude.

 

If one asset falls while another is stable or rises, the second asset can cushion some of the impact on the overall portfolio.

 

This is the basic principle behind diversification.

 

For an investor, this means looking only at the historical volatility of individual assets may not tell the whole story. What matters is also how those assets behave together.

 

That is where gold enters WhiteOak's analysis.

 

What happens when gold is added?

 

The study then examines portfolios containing debt, equity and gold. 

D = Debt (Crisil 10 Year Gilt Index), E = Equity (BSE Sensex TRI), G = Gold (MCX Gold INR). Source: MFIE, Bloomberg and Internal Research of WhiteOak Capital. ^Average 1 Year rolling return on daily basis and Standard Deviation (Volatility) of the r

 

Gold is represented by MCX Gold INR in the analysis.

 

WhiteOak found that a portfolio comprising 55% debt, 25% equity and 20% gold generated an average one-year rolling return of 11.59%, with volatility of 6.81%.

 

For comparison, the 100% debt portfolio had an average return of 6.76% and volatility of 6.37%.

 

In this historical analysis, therefore, the three-asset portfolio produced an average return that was 4.83 percentage points higher, while volatility was only marginally higher.

 

WhiteOak describes this as an illustration of how combining assets with different correlations can potentially improve a portfolio's risk-adjusted characteristics.

 

Again, this is a historical observation rather than a prediction.

 

Gold's role is different from equity's

 

The study also highlights gold's behaviour during periods when equities have struggled.

 

WhiteOak says gold has provided downside protection in many years when domestic equity delivered negative returns, and vice versa.

 

This is important because gold is not simply being added to chase higher returns.

 

Its potential role in a diversified portfolio is also connected to the fact that its price movements can differ from those of equities and bonds.

 

However, correlation between asset classes is not fixed. It can change depending on economic conditions, interest rates, inflation, geopolitical developments and market sentiment.

 

Therefore, gold should not be assumed to provide protection in every equity-market decline.

 

What does this mean for an investor?

 

The study offers a useful way of thinking about portfolio construction.

 

Instead of asking only, “Which asset will give me the highest return?”, an investor can also ask:

 

“How will these assets behave together?”

 

For example, consider an investor with a predominantly debt-oriented portfolio.

 

Adding some equity changes the portfolio's return potential but, depending on the allocation and market environment, may not increase overall volatility by the same proportion.

 

Adding another asset such as gold can alter the portfolio further because its price movements can differ from those of equity and debt.

 

This is the essence of multi-asset allocation.

 

But historical numbers come with limitations

 

Investors should be careful about taking the study's historical numbers and applying them directly to their own portfolios.

 

There are several reasons.

 

First, the study uses specific market indices as proxies for debt, equity and gold. An actual mutual fund or investment product can have different returns, costs, taxation, liquidity and portfolio characteristics.

 

Second, the study examines rolling one-year returns. An investor's actual holding period could be five, 10 or 20 years, and the experience can be very different over different periods.

 

Third, past performance does not guarantee future returns.

 

Most importantly, asset allocation should depend on an investor's financial goals, investment horizon, cash-flow requirements and ability to tolerate losses, rather than simply copying an allocation from a historical study.

 

WhiteOak's analysis illustrates an important principle of investing: portfolio risk is not simply the weighted average of the risks of individual investments.

 

The interaction between assets matters.

 

Its historical analysis shows that:

 

• A 100% debt portfolio had an average return of 6.76% and volatility of 6.37%.
• Adding 10% equity reduced the historical volatility in the study to 5.76%, while average return rose to 7.95%.
• Moving to 80% debt and 20% equity produced 9.14% average return with 6.39% volatility.
• Increasing equity further raised both historical return and volatility.
• A portfolio with 55% debt, 25% equity and 20% gold generated an average return of 11.59% with volatility of 6.81% in the period studied.

 

"Gold has provided some downside protection in many of the years when Domestic Equity has delivered negative returns and vice versa. Various Asset Classes have varied Degree of Correlation with each other. Economic Cycles and Markets across the globe are very dynamic and it is not possible to consistently time the winning asset class, but a right mix of these asset classes may help investors achieve optimum level of risk adjusted return to attain their long-term financial goals," said the study.