ET Wealth Expo: Saurabh Mukherjea suggests a simple 50:50 portfolio to diversify across India and the US

A simple way to build a diversified portfolio, according to Saurabh Mukherjea, Founder and Chief Investment Officer of Marcellus Investment Managers, is to split investments equally between the Nifty 50 and the S&P 500 and rebalance annually.

Speaking at ET Wealth Expo in Mumbai on Saturday, Mukherjea said investors do not need to predict which market will perform better in the coming years. Instead, they can invest equally in the Indian and US markets and rebalance their portfolios once a year to maintain the 50:50 allocation.

He said investors can choose a fixed date for rebalancing, such as their birthday or February 1, the Budget day, and bring their portfolio back to the 50:50 allocation on that date every year.


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According to Mukherjea, this is the simplest, lowest-cost and cheapest diversified portfolio, based on the asset allocation theory of Harry Markowitz, who received the Nobel Prize in 1990 and developed the theory in 1952. Mukherjea explained three benefits of following this approach.

The first benefit is that the portfolio's returns can move towards the higher-returning asset rather than remaining at the mathematical average of the returns generated by the two assets.

Mukherjea explained that when investors allocate money to two diversified assets that have little relationship with each other and rebalance annually, the returns can move towards the higher of the two assets over time.

He clarified that diversification does not mean investing in five Indian mutual funds, five small-cap funds or five domestic portfolio management services (PMS). It means investing in two assets that have little relationship with each other.

The second benefit is lower volatility. According to Mukherjea, the portfolio's volatility can move towards the lower of the two assets rather than remaining at their mathematical average. This means investors can potentially get higher returns while experiencing lower volatility. As a result, the return-to-risk ratio of the portfolio improves.

He described this as the free lunch of finance because investors can increase returns while reducing portfolio risk through diversification.

The third benefit is that investors do not need to forecast which market will perform better. Mukherjea said investors do not need to predict whether India or the US will outperform over the next 10 years. They also do not need to worry about political developments, government decisions, budgets or changes in long-term capital gains tax to follow this allocation strategy.

By maintaining a 50:50 allocation and rebalancing once a year, investors can benefit from whichever market performs better.

Explaining the rebalancing mechanism, Mukherjea said investors should start with an equal allocation to the Nifty 50 and the S&P 500.

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He added that, over time, if one market performs better, its share in the portfolio will increase. At the time of annual rebalancing, investors sell some of the investment in the market that has become more expensive and invest more in the market that has become cheaper to bring the allocation back to 50:50.

The market expert explained that this process involves buying more of the cheaper market and selling the more expensive market.

Responding to a question from the audience about why the portfolio's return would not immediately become the mathematical average of the two markets, Mukherjea said the effect of rebalancing becomes more evident over a longer period.

He said that if investors continue the 50:50 allocation and annual rebalancing for another 10 years, the returns would move closer to the higher-returning asset. Similarly, the portfolio's volatility would move closer to the lower-volatility asset.

According to him, the longer investors continue this process, the less relevant the lower-returning asset becomes in determining the portfolio's returns and volatility. Mukherjea also highlighted the importance of global investing, pointing out that a large part of Indian investors' expenses is linked to foreign markets.

Mukherjea mentioned that around 70% of day-to-day expenses are effectively in dollars, even though people believe they are spending in Indian rupees. He cited overseas education, foreign holidays, electronics, medicines, watches, aviation fuel and other imported products as examples.

He said Indian families spend around $9 billion annually on overseas education, while approximately 33 million Indians travel abroad on holidays every year. Assuming an expenditure of $1,000 per person, this amounts to around $30 billion in foreign holiday spending.

He also referred to the Reserve Bank of India's Liberalised Remittance Scheme (LRS), under which around $35 billion goes abroad every year.

According to Mukherjea, investors should consider global investing because their expenses and aspirations are increasingly linked to the global economy. He also pointed out that India accounts for around 3% of the global market, making global markets significantly larger than the domestic market.

However, he cautioned investors that global investing requires care because they are exposed to tax regimes in other countries. He also highlighted the scale of global markets and said investors should not treat global investing as an opportunity to casually trade through a brokerage account.

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He said investors should understand the tax implications and the wider range of investment opportunities available globally.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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