Saptaparni Family Office has Rs 50 lakh of new money to allocate today across Indian equity (earnings yield 4.6%), a 10-year government bond yielding 7.1%, a short-term debt fund and gold. Where would you put it, and what would change your mind?

I would put about half in equity, staggered in over six months, 30% in the 10-year bond, and 10% each in a short-term debt fund and gold. At a 7.1% bond yield, equity at 4.6% earnings yield must find 2.5 points of growth just to match the bond, so it earns its place but not all of it. The blend has an illustrative central case near 7.9% a year. A cheaper market or higher bond yields would change the mix.

Picture buying a shop that earns Rs 4.60 a year for every Rs 100 you pay, against lending the Rs 100 at 7.10%. The shop wins only if its earnings grow. Every asset's long-run return starts from what it pays you on the day you buy it, and anything beyond that must come from growth or from someone paying a higher price later. The 10-year bond held to maturity returns about 7.1%, give or take reinvestment. Equity starts at its earnings yieldEarnings per share divided by the share price, the inverse of the P/E; the return the business earns on your purchase price before any growth. of 4.6% and must grow from there.

A simple build-up for equity: if company earnings grow with inflation of 4.5% and the P/E stays at about 21.7, the long-run return is roughly 4.6% plus 4.5%, about 9.1%. That beats the bond by 2.0 points. The edge exists, but it is thinner than many investors assume, and it depends on two things going right: earnings growth, and the market not paying a lower multiple later. If the P/E drifts from 21.7 to 18 over ten years, that alone takes 1.9 points a year off, and equity returns about 7.2%, level with the bond.

Why half and not more in equity? The horizon of seven years supports a large equity share, but two things argue against going higher. The bond's 7.1% is a high starting yield to lock in for a decade, and the family's wealth is already concentrated in Indian industry through its own business, so more Indian equity adds to a risk they already carry. The allocation is a bet that equity earnings grow faster than 2.5% a year, sized so that if the bet fails, the portfolio still earns a reasonable return. The equity share goes in over six months through a systematic transfer planA standing instruction to move a fixed amount from one fund, usually a debt fund, into another, usually equity, at regular intervals. from the short-term debt fund, so the family does not commit everything at one valuation.

Three signals, each tied to the numbers. If equities fell 25%, the earnings yield would rise to about 6.1%, close to the bond yield, and I would move the equity share up towards 60%. If the 10-year yield rose to 8% while equity stayed put, the bond would become more attractive and I would add to it. And if the family said it might need the money within two years, the equity share would fall sharply, because the range of equity outcomes over two years includes large losses. An allocation is a view on starting prices, so a large change in prices should change it.

Two honest limits. The central cases are assumptions, and the inflation and earnings figures could be wrong in either direction. And gold earns no yield at all, so its 6% is a guess based on its role as a store of value; it earns its 10% because it tends to hold up when equity and the rupee are under stress, not because of an expected return.