Key Findings from the Report

According to a Report by Anoop Vijaykumar and Divyansh Agnani from Capitalmind Financial Services Pvt. Ltd., Silver does not warrant a significant allocation to portfolio despite stellar run in the 2024. The report focuses on the unintuitive advantage of uncorrelated assets. According to the study, a 50:50 Gold-Nifty portfolio would have outperformed both Gold and Nifty for over 20 years. The ideal portfolio for maximum returns with the least volatility would be Gold: 62%, Nifty: 35% and Silver: 3%.

Returns Garnered by Key Asset Class

Returns garnered by key asset class: Year till date (Jan 1-Oct 21’ 24), Silver has returned over 30%, followed by Gold with 23% compared to 15% for the Nifty. In 24 full years from 2000 to 2023, Silver ended the year ahead in five of them. Gold in seven, and the Nifty closed the year with the highest return in the remaining 12. The chart below shows the cumulative equity curve of the 50:50 Gold-Nifty Portfolio. The 50:50 strategy cumulative does better than 100% allocation to either asset class over the long term.

Equal Allocation Between Gold & Nifty Outperforms Both

The ideal allocation: Further the report states, the highest return while minimising volatility from 2000 to 2024 would have come from holding a combination of 32% Gold and 68% Nifty. The return recorded from this combination appears to 13.86% (compared to 13.23% for the Nifty). The lowest volatility combination while maximising return would have been a Gold-heavy portfolio with 62% Gold, 35% Nifty and a small 3% Silver allocation. The return recorded with lowest volatility combination is recorded at 13.33%.

Expert Insights

Anoop Vijaykumar, Investments & Head of Research, Capitalmind Financial Services said, “A portfolio primarily allocated to equities, supplemented by moderate Gold exposure, can offer not only more stable risk-adjusted returns but also potentially higher absolute returns with reduced drawdowns compared to a Nifty/Equities-only allocation strategy. Given its historical performance, Silver only merits a small allocation in constructing a low-volatility portfolio.”

Why Not 100% Nifty: The Power of Holding Uncorrelated Assets

If Nifty has the highest annualised return over two decades, why bother with considering either Gold or Silver? Why not be 100% allocated to the Nifty and count on its long-term edge to play out? After all, a ~1% incremental return compounded over two decades is a portfolio that’s nearly 20% bigger. This is where the power of asset allocation can get counterintuitive. The answer to whether an asset makes sense as an addition to a long-term portfolio depends on the extent to which it moves together with what you already own. Consider Gold. During the global financial crisis of 2008, when the Nifty fell by over 50%, gold proved to be a safe haven, rising by nearly 30% in the same year. The table below shows the pair-wise correlation of monthly returns between Silver, Gold, and the Nifty.

Exploring Optimal Allocations: The Efficient Frontier

In the chart below, we examined a select set of asset allocation combinations to see how multi-asset portfolios would have performed relative to the Nifty. It shows the outcome of every possible allocation combination to the three assets from 0 to 100% in increments of 1%, giving us over 5,000 possible allocations. The chart shows the risk (volatility) and reward (CAGR) of each of those 5,000+ combinations. It also highlights the 100% asset portfolios and the highest-return and lowest-volatility portfolios along with the 100% Gold, Silver and Nifty portfolios.

Reading This Chart

Consider the 100% Nifty dot roughly in the centre of the chart. The y-axis shows the annualised return of 13.2% from 2000 to Oct 2024 and the x-axis represents the annualised volatility of 22% it endured over that time. Any portfolio to the left of the Nifty has been less volatile and any portfolio higher than the Nifty has delivered higher returns. Portfolios both, to the left and higher than the Nifty have delivered higher returns with lower volatility. The optimal portfolios have been highlighted. The dots have been shaded as per the worst drawdown they experienced, lighter colours mean better drawdowns.

About Capitalmind Financial Services Pvt Ltd:

Capitalmind is a SEBI-registered Portfolio Management Service offering innovative investment strategies designed to generate superior returns for its clients. Leveraging a combination of quantitative analysis and qualitative research, Capitalmind delivers market-beating performance with industry-leading transparency and client service. For more information, visit www.capitalmind.in.