Does Adding Gold to Equity Portfolio Reduce Risk? Here’s Our Analysis Based on 29 Years of Data

Introduction

Gold has long been cherished in India, not just as jewellery, but as a store of value. Unlike stocks, which can swing wildly with market sentiment, gold is seen as a safe haven during uncertain times. On the other hand, equities are known for delivering strong long-term returns, but with high volatility and risk.

This brings us to an interesting question often discussed among investors: Can adding gold to an equity portfolio help reduce risk without significantly hurting returns? Some suggest that a 30% allocation to gold does just that. The key often lies in understanding how asset allocation can help balance risk and reward.

In this blog, we dive into the data and put this claim to the test — to see if blending gold with equities really leads to a more stable and balanced investment portfolio.

What We Set Out to Compare

To evaluate how adding gold impacts equity portfolio performance, we built and analyzed six distinct portfolio combinations using historical data from the past 29 years. Each portfolio combination listed below varied in gold and equity allocation to reveal differences in return consistency, drawdown, and overall risk.

1. 100% India Equity

2. 70% India Equity + 30% India Gold

3. 100% US Equity

4. 70% US Equity + 30% US Gold

5. 70% India Equity + 30% India Debt

6. 70% India Equity + 30% US Equity

   
   

For each portfolio, we evaluated three key metrics:

• CAGR (Compound Annual Growth Rate) – The Return You Actually Earn

  CAGR tells us the average annual return you would have earned if your investment grew at a steady rate every year.

  It helps smooth out the ups and downs and gives a true picture of long-term growth.

  
  

• Standard Deviation – A Measure of Risk or Volatility

  This tells us how much the returns fluctuate year to year.

  A higher standard deviation means more ups and downs — or more risk.

  A lower one means the portfolio is more stable.

  
  

• Rolling Returns – Consistency Over Time

  We also calculated average 3-year and 5-year rolling returns to understand how consistent the returns were:

  Rolling returns show the average returns over multiple overlapping time periods.

  This helps you see how often a portfolio delivered good returns, not just in one lucky year but across different market conditions.

Methodology To Find The Effectiveness of Adding Gold to Equity Portfolio

Step 1: Data Collection

We sourced historical data for the following asset classes to build realistic, data-driven portfolios and observe how each asset contributes to long-term performance and risk management:

• India Equity: Nifty 500 Index - Historical Data

• India Gold: Domestic gold prices - Monthly Gold Prices (1979-2021)

• US Equity: S&P 500 Index - S&P 500 (^GSPC) Historical Data - Yahoo Finance

• US Gold: International gold prices - Monthly Gold Prices (1979-2021)

• India Debt: Yield of 91-day and 6-month Government of India Treasury bills.

  
  

Step 2: Time Period Selection

To ensure consistency across asset classes, we chose the maximum time frame for which reliable and clean data was available.

∙ Nifty 500 data was available only from 1996

∙ India Gold data was available up to 2025

Therefore, we selected the 29-year period from 1996 to 2025 for our analysis.

Step 3: Portfolio Construction & Metric Calculation

For each of the six portfolios, we assumed an initial investment of:

∙ ₹1,00,000 for India-based portfolios

∙ $10,000 for US-based portfolios

To maintain the integrity of the chosen asset allocation (like 70% equity + 30% gold), we rebalanced each portfolio at the end of every month. This means adjusting the portfolio weights monthly to bring them back to the original allocation, ensuring that performance isn't skewed by one asset significantly outperforming the other over time.

Step 4: Performance & Risk Metrics Calculation

For each portfolio, we calculated the following:

∙ CAGR (returns) – To measure average annual growth

∙ Standard Deviation – To assess portfolio risk and volatility

∙ 3-Year and 5-Year Rolling Returns – To evaluate the consistency of performance over time

Case Study 1: Gold as a Diversifier in an Indian Equity Portfolio

Metric	P1: 100% Indian Equity	P2: 70% Indian Equity + 30% Indian Gold
5-Year Rolling Avg Return	13.53%	13.92%
3-Year Rolling Avg Return	14.15%	14.10%
Volatility (Std Dev)	24.87%	17.70%
End Value (₹1L invested)	₹36,91,824	₹39,73,324

Interpretation

• Return Consistency: Both portfolios showed almost identical average returns over time. In fact, Portfolio 2 (with gold) slightly edged ahead on the 5-year rolling return, suggesting that adding gold didn’t hurt long-term growth.

• Much Lower Risk: By adding just 30% gold to the equity portfolio, volatility dropped significantly — a ~30% reduction in risk. This shows how gold acts as a stabilizer, reducing portfolio swings during market ups and downs.

• Almost No Sacrifice in Wealth: Even with lower volatility, Portfolio 2 ended with nearly the same final corpus as the 100% equity portfolio. That’s risk reduction without giving up wealth creation.

Case Study 2: Gold as a Diversifier in a US Equity Portfolio

Metric	P1: 100% US Equity	P2: 70% US Equity + 30% US Gold
5-Year Rolling Avg Return	6.37%	7.33%
3-Year Rolling Avg Return	7.19%	7.64%
Volatility (Std Dev)	15.65%	12.00%
End Value ($10K invested)	$91,327	$1,02,923

Interpretation

• Better Risk-Adjusted Returns: Portfolio 2 not only has lower volatility (12% vs 15.65%) but also higher returns across both 3-year and 5-year rolling periods. This is a rare and valuable combination.

• Significantly Higher Final Value: A $10,000 investment in Portfolio 2 ends up at $1,02,923, compared to $91,327 in pure US equity. That’s a ~13% higher corpus, combined with reduced drawdowns and smoother compounding.

• Gold as a True Stabilizer: Gold’s low correlation with equities really shines here. During equity slumps, gold likely held or even gained value, helping offset portfolio losses.

Case study 3 – US equity as a diversifier in an Indian equity portfolio

Metric	P1: 100% Indian Equity	P2: 70% Indian Equity + 30% US Equity
5-Year Rolling Avg Return	13.53%	12.14%
3-Year Rolling Avg Return	14.15%	12.77%
Volatility (Std Dev)	24.87%	18.55%
End Value (₹1L invested)	₹36,91,824	₹30,87,946

Interpretation

• Lower Returns Across the Board: Allocating 30% to US equity pulls down both 3-year and 5-year rolling average returns by roughly 1.3–1.4 percentage points.

• Meaningful Risk Reduction: Volatility drops from 24.87% to 18.55%, shaving off about 25% of portfolio swings—a significant stabilization.

• Final Wealth Impact: A ₹1 lakh investment grows to ₹36.9 lakh in the pure-India portfolio versus ₹30.9 lakh with 30% US equity—a gap of ~₹6 lakh.

Case study 4 – Indian Debt as a diversifier in Indian equity portfolio

Metric	P1: 100% Indian Equity	P2: 70% Indian  Equity + 30% Indian Debt
5-Year Rolling Avg Return	13.53%	12.22%
3-Year Rolling Avg Return	14.15%	12.57%
Volatility (Std Dev)	24.87%	17.39%
End Value (₹1L invested)	₹36,91,824	₹28,24,354

Interpretation

• Returns: Over the long term, ₹1 lakh in P1 would grow to ₹36.91 lakh, while in P2 it would grow to ₹28.24 lakh — about ₹8.7 lakh lower.

• Volatility (Risk): P2 brings risk down to 17.39% by allocating 30% to debt, which acts as a stabilizer.

• Risk-Return Trade-Off: P2 sacrifices some return for reduced volatility, making it suitable for moderate-risk investors. The debt portion cushions the portfolio during market downturns, offering a smoother ride.

Comparative Results: Which 30% Diversifier Performed Best?

Adding Indian gold brought a 28.8% reduction in risk without affecting overall returns, making it a strong hedge. US gold lowered risk by 23.3% and even led to a modest improvement in returns, positioning it as an effective complement.

Allocating to US equity trimmed risk by 25.4% but also caused a notable dip in performance. Indian debt provided the highest risk drop at 30.1%, but returns took a substantial hit, making it suitable for more conservative strategies.

Asset Added	Risk Reduced?	Return Impact	Final Verdict
🟡 Indian Gold	✅ Yes (28.8% lower)	✅ No significant loss	✔️ Great Diversifier
🟡 US Gold	✅ Yes (23.3% lower)	✅ Slightly better	✔️ Great Diversifier
🌍 US Equity	✅ Yes (25.4% lower)	❌ Noticeably lower	⚠️ Trade-off exists
🏦 Indian Debt	✅ Yes (30.1% lower)	❌ Substantially lower	⚠️Conservative use only

What This Means for Indian Investors

1. Gold is Your Best Diversification Tool. Adding Indian or global gold to your portfolio significantly reduces risk without compromising returns. It acts as a reliable cushion during market crashes.

   ➤ Great for long-term investors who value peace of mind.

2. International Equity Adds Stability—But Not Always Returns. US equity reduces portfolio volatility but may slightly dilute returns if Indian equities outperform.

   ➤ Consider it for global exposure, not maximum growth.

3. Debt Lowers Risk—but Also Limits growth. While debt offers safety and smoother returns, the wealth created is significantly lower.

   ➤ Ideal for conservative investors, retirees, or short-term goals.

4. Sweet Spot: 70% Equity + 30% Gold. This combo gives the most balanced risk-return profile, especially for SIP investors or those investing through market cycles.

   ➤ A solid core allocation for Indian retail investors.

Conclusion:

Our study shows that diversification isn't just a buzzword—it can genuinely reshape your investment journey. Whether you're chasing long-term wealth or looking for peace of mind during market dips, what you include in your portfolio matters just as much as how much you invest.

While equities remain the engine of long-term growth, adding gold to the mix stands out as a smart strategy. Gold consistently lowers volatility without pulling down returns, making it an ideal choice for investors seeking stability.

US equity brings a layer of global diversification and currency hedge, though it might come at the cost of slightly lower returns compared to a pure India equity play. Indian debt, on the other hand, is a solid shock absorber but may significantly drag performance over long timeframes.