Does Warren Buffett's '90/10' investment rule work for Indian investors?
What's the story
Warren Buffett, the billionaire investor and Chairman, CEO of Berkshire Hathaway, has long been a beacon of investment wisdom. One of his most popular strategies is the "90/10 rule." The approach involves investing 90% in a low-cost S&P 500 index fund and the remaining 10% in short-term government bonds. The idea is to give average investors broad market exposure rather than trying to predict market movements or putting all their money into a few stocks.
Personal application
Buffett's personal investment strategy
Buffett has not just preached this strategy but also practiced it personally. In a 2013 letter to Berkshire Hathaway investors, he revealed that his will instructs an appointed trustee to invest the money left for his wife using the same 90/10 rule. Buffett believes that this investment strategy would yield better long-term results than those achieved by most investors who use high-fee managers.
Local adaptation
Adapting the rule for Indian investors
The 90/10 rule was originally designed for US investors in an American economy. However, experts believe it can be adapted for Indian investors with some modifications. Vaqarjaved Khan, CFA at Angel One, suggests that this strategy could work better in the US due to its efficient equity markets and fewer alpha opportunities.
Expert opinion
Core philosophy of the strategy
Prabhakar Kudva, the Director and Principal Officer at Samvitti Capital, believes that while Buffett's specific asset recommendations are US-centric, the underlying logic can be applied to Indian equity and debt markets. He says the core philosophy of this strategy is embracing passive investing for a long-term wealth creation at a minimal cost. This makes it a valuable framework for individuals seeking an effective approach to building wealth.
Strategy adjustment
Modified version for Indian investors
Khan recommends a modified version of the 90/10 strategy for Indian investors. He suggests allocating 75% toward Nifty 500, a diversified index, and 15% toward large-cap/mid-cap active funds for additional alpha. The remaining 10% could be allocated to government securities or cash equivalents for liquidity. Kudva also recommends investing in a low-cost index fund that tracks broad-based Indian indices such as Nifty 50, Nifty 500 or BSE 500 to replicate Buffett's strategy in the Indian market.
Risk factors
Debt component and risk factors
For the debt component, Kudva suggests investing in liquid funds/short-term debt mutual funds that primarily invest in sovereign and AAA-rated securities. These funds offer high liquidity and capital preservation, thus making them an ideal substitute for government bonds within this strategy. However, both Khan and Kudva warn that the high 90% allocation to equity makes it highly volatile and unsuitable for investors with a short time horizon or low-risk tolerance.