Risk, Regret, and the Case for a BufferRisk, Regret, and the Case for a Buffer

Howard Marks quoted Elroy Dimson of the London Business School in one of his lectures on risk: "Risk means more things can happen than will happen." That line explains why the case for hybrid allocation is so hard to make to investors who've spent three years in a bull market.

The problem isn't that people don't understand asset allocation. It's that they understand it fine in the abstract and then experience it as unnecessary friction when equity is working. The distribution of futures is wide. But in a bull run, you only get to live in one of them—the good one—and it quietly convinces you that the bad ones weren't really in the range.

They were. They always are.

This article is an attempt to show what that actually means—in rupees, across real portfolios, at the moments when the bad futures arrived.

Six weeks. And the house that almost wasn't.

Arjun had been disciplined about his house goal in a way that most of his friends hadn't. He'd started a SIP of Rs. 55,000 a month in January 2022 in an all-equity portfolio strategy with one specific target: Rs. 30 Lakh for a down payment by early 2025. Three years. One goal. He didn't touch it.

By September 2024, he was sitting on Rs. 31 Lakh. He was ahead of target, three months early. He needed the money in January 2025. By then the corpus had slipped to Rs. 28.9 Lakh—below target, but close enough that with a small top-up he made the down payment. The house is his.

His friend, you, had the same goal, the same timeline, the same SIP amount. You just needed the money six weeks later; the builder had pushed the registration to February.

By February 2025, that same portfolio was worth Rs. 26.2 Lakh. Four Lakh short of target. The registration was delayed again while you scrambled to bridge the gap.

Six weeks. Same strategy. Same SIP. Different outcome.

Arjun got lucky. You didn't. Neither of you made a single bad investment decision.

How we got here: the quiet removal of India's debt advantage

There used to be a clean structural answer to what happened.

Earlier, you built your goal corpus in equity for growth, and in the final year or two, you shifted gradually into debt. If markets fell at the wrong moment, the debt portion absorbed the blow.

It worked because debt mutual funds had a genuine tax advantage. Hold a debt fund for more than three years and your gains qualified for long-term capital gains treatment, taxed at 20% with indexation. For anyone in the 30% tax bracket, a debt fund held long enough was meaningfully better than a fixed deposit.

In April 2023, that changed. Through Section 50AA of the Finance Act, the government removed the indexation benefit entirely. Any debt fund bought on or after April 1, 2023, now gets taxed at your slab rate regardless of the holding period.

Investors noticed. Debt mutual fund AUM, which had once been nearly 47% of the total mutual fund industry, had already been sliding. The tax change turned a slide into a rout. By December 2024, debt schemes held just 14.6% of industry AUM. The number of debt fund accounts shrank in absolute terms even as the industry was adding millions of new equity investors every month.

The cushion left the portfolio, not just behaviorally but structurally. And for a while, because equity markets were doing what equity markets do during a bull run, almost nobody felt its absence.

The anesthesia years: Why missing debt felt like a smart call

From 2022 through September 2024, Indian equity markets ran hard enough to make every portfolio decision look correct in hindsight. If you were all-equity, you felt brilliant.

Our own Surge India portfolio, which we've run since November 2017, shows the journey clearly. If you had started a SIP of Rs. 55,000 a month in January 2022, here is what the portfolio would have looked like at each stage:

Date	Portfolio value	Return on invested amount	What it feels like
Jan 2022	Rs. 0.55L invested	-	Starting out
Jun 2022	Rs. 2.9L	−12% on Rs. 3.3L	Uneasy—already behind
Jan 2023	Rs. 7.0L	−3% on Rs. 7.2L	Nothing to show for a year
Jan 2024	Rs. 19.7L	+43% on Rs. 13.8L	Starting to believe
Sep 2024	Rs. 31.0L	+71% on Rs. 18.2L	Ahead of target. Confident.
Jan 2025	Rs. 28.9L	+42% on Rs. 20.4L	Below target. Window closing
Feb 2025	Rs. 26.2L	+25% on Rs. 20.9L	If your goal was here...

Surge India portfolio NAV data, CMW internal records. SIP of Rs. 55,000/month from Jan 2022.

Look at the column on the right. From January 2022 through early 2023, the portfolio was barely above invested capital. The test was right there: stay in equity or don't. Most people stayed. The succeeding bull market was kind to them.

But three years of equity outperforming debt by a wide margin, visibly, month after month convinced investors that the old rules about asset allocation were overcautious. Debt was slow, tax-inefficient, and for people who didn't know better.

Howard Marks has a name for this. "The riskiest thing in the world," he says, "is the belief that there's no risk." The 2020-to-2024 bull run didn't remove risk from Indian equity portfolios. It made the risk invisible for long enough that people stopped preparing for it.

And then October 2024 arrived.

What the correction actually cost and why it wasn't just about the fall

By February 2025, the Surge India portfolio had fallen 22.7% from its September peak. Not a crash by historical standards—the COVID fall of 2020 was 33.5%—but enough to change outcomes. Arjun made his down payment in January. You missed yours in February.

This is what investing textbooks call timing risk. But you don't think about it in basis points and drawdown percentages; it's experienced as something more personal. You think, I did everything right for three years and I'm still short. That feeling isn't irrational. It's the correct emotional response to a structural gap in your portfolio.

Now consider an investor with more at stake than a house. Consider what the same sequence of events does to someone who doesn't miss a goal by a few weeks, but who panics during the drawdown and exits entirely.

We ran the numbers. Rs. 50 Lakh invested in Surge India in January 2020. Two investors. Same portfolio. COVID arrives in March.

	Investor A—stayed put	Investor B—exited at trough, re-entered Jan 2021
Mar 2020 (COVID trough)	Rs. 33.3L—holds on	Rs. 33.3L—parks in FD @ 5.5%
Sep 2024 (market peak)	Rs. 1.53 crore	Rs. 97.5L
Feb 2025 (correction)	Rs. 1.18 crore	Rs. 75.4L
Today (Mar 2026)	Rs. 1.34 crore	Rs. 85.7L
Gap today	—	−Rs. 48.8L

Rs. 50L lump sum, Surge India NAV data. Investor B exits Mar 23, 2020, parks in FD at 5.5%, re-enters Jan 2021.

Investor B didn't do anything irrational. They were scared. They protected what they had. They waited until things were clearer. These are normal, human responses to watching Rs. 16 Lakh disappear in eight weeks.

They just cost themselves Rs. 48.8 Lakh.

Every investment has a point of regret. The ones that work are the ones you don't abandon.

In a pure equity portfolio, the point of regret arrives during a market fall. Your corpus is down. Your goal may be at risk. The regret is not abstract; it's a number you can see getting larger every week. That is precisely the moment the portfolio demands you do nothing. And the bigger the fall, the harder doing nothing becomes.

In a hybrid portfolio, the point of regret arrives when equity is running hard and your portfolio lags behind a pure equity benchmark. Your colleague mentions his returns. You notice the gap. It's uncomfortable. But your corpus is intact. Your goal is not at risk. You don't need to make any decision.

One kind of regret is dangerous. The other is just annoying.

The back tested data for a hybrid allocation—running at roughly 65% equity and 35% debt—makes this concrete across two real market crises. Here is how the two approaches compare at each moment that mattered:

Market event	Surge India (equity)	Hybrid allocation	What the investor lived through
Jan–Mar 2020 (COVID)	−33.5% in 8 weeks	−21.9% in 8 weeks	Equity: one-third gone. Hybrid: one-fifth gone.
5-yr CAGR (Dec 2020–Dec 2025)	21.3% per year	14.8% per year	Equity clearly ahead—the regret is real
Sep 2024–Feb 2025 (correction)	−22.7% in 5 months	−7.9% in 5 months	Equity demands a decision. Hybrid does not.

Surge India: actual NAV data, Nov 2017 onwards. Hybrid: backtested allocation at approx. 65% equity / 35% debt. 5-year CAGR calculated December 2020 to December 2025.

The return gap over five years is real and worth naming honestly: Surge India delivered 21.3% CAGR over the period, compared to 14.8% for the hybrid allocation. That is the cost of the cushion. In a sustained bull run, equity wins on returns, and the hybrid investor knows it.

But in COVID, equity fell 33.5%—the kind of fall that turned Investor B into someone parked in an FD. The hybrid allocation fell 21.9%. In the 2025 correction, equity down 22.7%, hybrid down 7.9%.

Marks calls this asymmetry the goal of protecting more on the downside than you give up on the upside. The 6.5 percentage point return gap is the price of that protection. Whether it's worth paying depends on a single question: how much does a 33.5% fall cost you—in rupees, in behavior, in the decision it forces—relative to what the cushion costs on the way up?

For Investor B, it cost Rs. 48.8 Lakh. For you, it cost a registration that had to wait. For anyone who stayed in their seat, the cushion cost nothing. But staying in the seat through a 33.5% fall is a harder ask than most investors and most portfolio statements acknowledge.

What this is really about

The danger isn't the fall. It's what the fall makes you do.

Investors face two risks, not one. The obvious one is losing money. The less obvious one is being so rattled by a drawdown that you abandon the strategy before it can deliver. Both can destroy a portfolio. The second one is more common, and more insidious, because it disguises itself as prudence.

A well-designed hybrid portfolio is not the conservative choice. It's the asymmetric one. You accept a smaller return in the good years—14.8% instead of 21.3%, over five years of one of India's strongest bull runs. In exchange, when the market fell 33.5% in COVID and 22.7% in 2025, your portfolio fell half as much. The decision to exit was never forced. The compounding was never interrupted.

The equity investor who stayed through both corrections also compounded. They may even have done better on paper at the peak. But the journey asked them to hold steady while one-third of their corpus disappeared in eight weeks, and then again while nearly a quarter vanished in five months. Most investors, faced with that twice, make at least one exit they regret.

"The essence of investing is appropriately bearing risk for profit."—Howard Marks

The return gap is the cost of not being Investor B. Of staying in the seat through March 2020. Of not getting the registration date wrong by six weeks. Over five years, across every future this market delivered—a pandemic, a rate cycle, a sharp correction—that cost was 6.5 percentage points per year. The behavior it bought is harder to put in a table, but it's worth considerably more.

In the next article, we'll dive deep into the Hybrid categories: who are these for and what’s the catch. The final article in the series will be an explainer on Anchor Investment approach in PMS.  The webinar is on 17th April. We'd like to walk you through it.

Methodology notes: Surge India performance is based on actual portfolio NAV data from November 2017 onwards. Hybrid allocation is based on backtested NAV data for a blended strategy at approximately 65% equity / 35% debt. The 5-year CAGR comparison covers December 2020 to December 2025. Past performance and backtested data are not indicative of future results. Returns are not verified by SEBI.

 

 

This is the first of two articles ahead of the launch of Anchor, our new hybrid basket in PMS. The second article explains what the hybrid category is and how Anchor is built. This one asks a prior question: why does asset allocation matter in the first place—and what has three years of ignoring it quietly cost Indian investors?