Debt and equity allocation drift

An investor can follow a strict rule for new money — say, put 80% of every year's savings into debt and 20% into equity — and still watch the overall portfolio's debt-versus-equity percentage drift away from that 80:20 split over time.

The reason is simple: debt and equity do not grow at the same rate. If equity earns more than debt year after year, the equity slice of the portfolio grows faster than the debt slice, even while new contributions keep arriving in a fixed 80:20 ratio — so the blended, whole-portfolio percentage slowly drifts towards equity, away from where the fixed policy alone would put it.

The workbook's own case (Mr Z, Chapter 20, Case 1) assumes annual investing of disposable savings in a fixed 80:20 (debt:equity) ratio, with an expected long-run return of 8.5% on debt and 15% on equity. Starting from an existing base of Rs 35 lakh in debt and Rs 15 lakh in equity at age 52, the year-by-year portfolio-level allocation comes out as:

Even though every year's new savings go in at a fixed 80:20 split, the portfolio's overall debt weight never sits at 80% — it starts around 70% and drifts downward, toward 69.38%, because the existing balances compound at their own, different rates (8.5% for debt, 15% for equity) each year, and the 15% equity return consistently outruns the 8.5% debt return on the money already invested.

Using the workbook's Mr Z figures directly: at age 52 his non-retirement savings and investments total Rs 50 lakh, with 30% already in equity (Rs 15 lakh) and 70% in debt (Rs 35 lakh). Each year, his new disposable savings are split 80:20 into debt and equity.

By age 55, three years later, his debt portfolio has grown to roughly Rs 63.28 lakh and his equity portfolio to roughly Rs 27.78 lakh — giving a blended allocation of about 69.49% debt / 30.51% equity, not 70:30 and nowhere near the 80:20 split his new contributions actually follow. The equity portfolio's faster 15% growth rate has quietly pulled the blended percentage away from both the original 70:30 starting mix and the 80:20 new-money policy, illustrating why an adviser has to periodically check the actual portfolio split, not assume the investment policy alone determines it.

Chapter 20 (Case Studies), Case 1, on Mr Z's retirement planning, works out this year-by-year debt and equity portfolio table as part of a larger multi-part question. Expect a case-study question giving separate debt and equity return assumptions and a fixed new-money split, asking for the resulting blended portfolio percentage in a later year — distinct from the separate question of whether to fold in the retirement corpus.

• A fixed split for new contributions does not keep the overall portfolio at that split — differing returns on the existing balances pull the blended figure away from it over time.
• Higher-returning assets pull the blended weight toward themselves, even under a policy designed to favour the lower-returning asset (here, 80% to debt).
• This is a different question from "including or excluding the retirement corpus" — that comparison is about the point of retirement itself; allocation drift tracks the pre-retirement, year-by-year change in the non-retirement portfolio's own mix.
• Do not assume the drift is always toward equity — it depends entirely on which asset class outperforms in the scenario given.