Learn how to balance debt and equity investments based on age, goals, and risk tolerance. Includes practical allocation frameworks and rebalancing strategies.
How much should you invest in equity vs debt? This asset allocation decision is more important than picking individual funds.
Studies show that asset allocation determines up to 90% of portfolio returns variability. Here's how to get it right.
The Basics: Debt vs Equity
Characteristics Comparison
| Factor |
Equity |
Debt |
| Returns |
10-14% |
6-9% |
| Risk |
High volatility |
Low volatility |
| Short-term |
Can drop 30-50% |
Stable (2-5% movement) |
| Long-term |
Usually positive |
Consistent |
| Inflation hedge |
Good |
Moderate |
| Liquidity |
High |
Varies |
Calculate potential returns: Use our SIP Calculator for equity and FD Calculator for debt.
Return Comparison: ₹10,000/Month for 20 Years
| Allocation |
Expected Return |
Corpus |
| 100% Equity |
12% |
₹1 Cr |
| 80% Equity, 20% Debt |
11% |
₹86 L |
| 60% Equity, 40% Debt |
9.5% |
₹70 L |
| 40% Equity, 60% Debt |
8% |
₹59 L |
| 100% Debt |
7% |
₹52 L |
Higher equity = Higher returns (with more volatility).
Classic Allocation Rules
The Age-Based Rule
Rule: Equity % = 100 - Your Age
| Age |
Equity |
Debt |
| 25 |
75% |
25% |
| 35 |
65% |
35% |
| 45 |
55% |
45% |
| 55 |
45% |
55% |
| 65 |
35% |
65% |
Modern variation: Equity % = 110 - Age (due to longer lifespans)
The Life Stage Rule
| Life Stage |
Equity |
Debt |
Reasoning |
| Early career (22-30) |
80-90% |
10-20% |
Long horizon, can recover |
| Growth phase (30-40) |
70-80% |
20-30% |
Building wealth, some stability |
| Peak earning (40-50) |
60-70% |
30-40% |
Balancing growth and protection |
| Pre-retirement (50-60) |
40-60% |
40-60% |
Protecting accumulated wealth |
| Retirement (60+) |
30-40% |
60-70% |
Income focus, capital preservation |
The Risk-Based Rule
| Risk Tolerance |
Equity |
Debt |
Suitable For |
| Aggressive |
80-100% |
0-20% |
Young, high-income, no dependents |
| Moderately aggressive |
70-80% |
20-30% |
Long horizon, comfortable with volatility |
| Moderate |
50-70% |
30-50% |
Balanced approach, some concerns |
| Conservative |
30-50% |
50-70% |
Near retirement, low risk tolerance |
| Very conservative |
10-30% |
70-90% |
Retired, need capital safety |
Building Your Asset Allocation
Step 1: Assess Your Factors
| Factor |
Increases Equity |
Increases Debt |
| Age |
Younger |
Older |
| Income stability |
Stable job |
Variable income |
| Dependents |
None/few |
Many |
| Other assets |
Have property/pension |
Only financial assets |
| Risk tolerance |
High |
Low |
| Goals |
Long-term |
Short-term |
Step 2: Scoring Method
| Factor |
Score 1 (More Debt) |
Score 5 (More Equity) |
| Age |
> 55 |
< 35 |
| Job stability |
Unstable |
Very stable |
| Dependents |
3+ |
0 |
| Emergency fund |
< 3 months |
> 6 months |
| Investment horizon |
< 5 years |
> 15 years |
| Comfort with 30% drop |
Would panic |
Would buy more |
Average score:
- 4-5: 80-90% equity
- 3-4: 60-80% equity
- 2-3: 40-60% equity
- 1-2: 20-40% equity
Step 3: Practical Allocations
| Profile |
Sample Allocation |
| 28-year-old, single, stable job |
85% equity, 15% debt |
| 35-year-old, married, 1 child |
70% equity, 30% debt |
| 45-year-old, 2 kids in school |
60% equity, 40% debt |
| 55-year-old, pre-retirement |
45% equity, 55% debt |
| 65-year-old, retired |
30% equity, 70% debt |
Equity Allocation Breakdown
Within Equity
| Category |
Aggressive |
Moderate |
Conservative |
| Large-cap |
30% |
50% |
70% |
| Mid-cap |
30% |
30% |
20% |
| Small-cap |
25% |
15% |
5% |
| International |
15% |
5% |
5% |
Implementation
| Allocation |
Fund Type |
| Large-cap |
Nifty 50 index fund, large-cap fund |
| Mid-cap |
Mid-cap index/active fund |
| Small-cap |
Small-cap fund (limited) |
| Flexi-cap |
For simplicity (single fund) |
Debt Allocation Breakdown
Within Debt
| Category |
Conservative |
Moderate |
Growth |
| Liquid funds |
30% |
20% |
10% |
| Short-duration |
30% |
30% |
20% |
| Corporate bonds |
20% |
30% |
40% |
| PPF/FD |
20% |
20% |
30% |
Purpose-Based Debt Allocation
| Purpose |
Instrument |
| Emergency fund |
Liquid fund |
| Short-term goals |
Ultra-short, short-duration |
| Medium-term stability |
Corporate bond, banking PSU |
| Long-term safety |
PPF, debt funds |
Rebalancing Your Portfolio
Why Rebalance?
| Scenario |
Without Rebalancing |
With Rebalancing |
| Bull market |
Equity grows to 85% |
Maintain 70% (sell some) |
| Bear market |
Equity falls to 55% |
Maintain 70% (buy more) |
| Result |
Risk increases/decreases |
Risk stays consistent |
Rebalancing Methods
| Method |
Trigger |
Action |
| Calendar |
Every year |
Rebalance to target |
| Threshold |
±5% deviation |
Rebalance when breached |
| Combination |
Annual + threshold |
Best of both |
Rebalancing Example
Target: 70% Equity, 30% Debt | Portfolio: ₹10 L
| Start |
After Bull Market |
After Rebalancing |
| Equity: ₹7 L |
Equity: ₹9.1 L (76%) |
Equity: ₹8.4 L (70%) |
| Debt: ₹3 L |
Debt: ₹2.9 L (24%) |
Debt: ₹3.6 L (30%) |
| Total: ₹10 L |
Total: ₹12 L |
Total: ₹12 L |
Action: Sell ₹70K equity, buy ₹70K debt.
Age-Based Glide Path
The Glide Path Concept
Gradually reduce equity as you age, following a predetermined path.
| Age |
Equity |
Debt |
Adjustment |
| 25 |
85% |
15% |
Start |
| 30 |
80% |
20% |
-5% equity |
| 35 |
75% |
25% |
-5% equity |
| 40 |
70% |
30% |
-5% equity |
| 45 |
60% |
40% |
-10% equity |
| 50 |
50% |
50% |
-10% equity |
| 55 |
40% |
60% |
-10% equity |
| 60 |
35% |
65% |
-5% equity |
Implementing the Glide Path
| Method |
How It Works |
| SIP allocation change |
Redirect new investments |
| Annual switch |
Switch accumulated funds |
| Target date fund |
Automatic (but limited options in India) |
Special Situations
When You Have EPF
| Total Debt = EPF + PPF + FD + Debt MF
If EPF is large, you can take more equity elsewhere.
| EPF Balance |
Additional Debt Needed |
| ₹20 L |
Less debt in MF |
| ₹50 L |
Minimal additional debt |
| ₹1 Cr |
Focus equity in MF |
When You Have Real Estate
Real estate is a leveraged, illiquid asset.
| Situation |
Adjustment |
| Have property (home) |
Reduce equity slightly |
| Have investment property |
Consider as alternative asset |
| Large home loan |
Build liquid assets faster |
Market Conditions
| Market State |
Action |
| High valuations (PE > 25) |
Don't increase equity % |
| Fair valuations (PE 18-22) |
Stick to target |
| Low valuations (PE < 18) |
Consider increasing equity |
But: Don't time excessively. Stick to your allocation mostly.
Common Allocation Mistakes
1. Too Conservative Too Young
| Age |
Bad Allocation |
Good Allocation |
25-Year Difference |
| 25 |
40% equity |
80% equity |
₹35 L vs ₹75 L |
Young people can afford volatility - they have decades to recover.
2. Too Aggressive Too Old
| Age |
Bad Allocation |
Risk |
| 55 |
90% equity |
40% crash = retirement delayed |
Near retirement, protect what you've built.
3. Not Rebalancing
| Situation |
Problem |
| Bull market gains |
Portfolio becomes too risky |
| Bear market losses |
Portfolio becomes too conservative |
Rebalance annually at minimum.
4. Emotional Changes
| Market |
Emotional Response |
Correct Response |
| Crash |
"Sell everything!" |
Rebalance (buy equity) |
| Bull run |
"Go all in!" |
Rebalance (sell equity) |
Stick to your plan.
Sample Portfolios
Portfolio 1: Young Aggressive (Age 28)
| Asset |
Allocation |
Investment |
| Large-cap |
30% |
Nifty 50 index fund |
| Flexi-cap |
30% |
Flexi-cap fund |
| Mid-cap |
20% |
Mid-cap fund |
| Debt |
15% |
Short-duration fund |
| International |
5% |
US equity fund |
Portfolio 2: Balanced Growth (Age 40)
| Asset |
Allocation |
Investment |
| Large-cap |
35% |
Large-cap fund |
| Flexi-cap |
20% |
Flexi-cap fund |
| Mid-cap |
10% |
Mid-cap fund |
| Corporate bonds |
20% |
Corporate bond fund |
| PPF |
10% |
PPF contributions |
| Liquid |
5% |
Liquid fund |
Portfolio 3: Conservative Pre-Retirement (Age 55)
| Asset |
Allocation |
Investment |
| Large-cap |
25% |
Large-cap fund |
| Balanced |
15% |
Balanced advantage fund |
| Corporate bonds |
25% |
Corporate bond fund |
| Short-duration |
15% |
Short-duration fund |
| FD/PPF |
15% |
Bank FD, PPF |
| Liquid |
5% |
Liquid fund |
Conclusion
| Factor |
Lower Equity |
Higher Equity |
| Age |
Older |
Younger |
| Horizon |
Shorter |
Longer |
| Risk tolerance |
Lower |
Higher |
| Income stability |
Lower |
Higher |
| Dependents |
More |
Fewer |
| Existing assets |
Less |
More |
Key principles:
- Start with age-based rule as baseline
- Adjust for personal factors
- Rebalance annually
- Follow a glide path as you age
- Don't let emotions override your plan
Your asset allocation is the most important investment decision you'll make. Get it right, stick to it, and adjust systematically.
Plan your allocation: Use our SIP Calculator for equity projections and FD Calculator for debt comparisons.
