Let Money Do All The Talking

We Indians have always been conservative when it comes to our Money. Our risk appetite is one of the lowest in the world. Our primary concern remains to preserve the principal amount that we invest paying little to no attention to the return on investment that it generates. While preserving the Principal amount may be the primary aim, the focus on growing the capital needs its fair share of contemplation as well, especially if the endeavor is to invest for a long tenure.

Second Source of Income

One of the Best Investment Guru, Warren Buffet once said ‘Never depend on a single source of Income. Make Investment to create a second source’.

Most of us are employed by an organization and get paid on the monthly basis for the service that we render. The Pandemic that hit us hard last year opened the Pandora’s box. Many industries came to a grinding halt and millions lost their jobs overnight. This brought forth the significance of having more than 1 source of income under our belt.

What better way to make money with the money that you already have? Investing does that beautifully. With the advances that have taken place in the digital space, investing your money is only a click away.

Having said this, the million-dollar question that begs to be addressed is; Where should you put your money and what is the best way to grow your Money?

But first let us address the current state of affairs in India.

The Indian Psyche

Our love affair with Debt investment avenues never seems to abate. The fear of losing the money is the main cause of concern. More than the returns, what concerns us more is the fear of losing our money. This Indian psyche has been carried forward from generations.

Throughout history, we have invested our money either into Gold or in Debt instruments in the form of Fixed Deposit or Bonds none of which offer attractive returns. Even the Insurance Products which we purchase are chiefly Endowment products which offer paltry returns with little Life cover.

Nevertheless, can we afford to place our money across Debt Instruments and expect to get rich?

The Inflation Monster

Inflation can simply be explained as an increase in the cost of Services and Goods thereby increasing the Cost of living.

A phenomenal 55% of India’s population join the ranks of being called as Middle Class. That is equivalent to almost 75 Crores Individuals who feel the pinch of this rising cost.

Let’s study the impact of this and hit you with some numbers.

RBI’s Inflation rate is forecasted at 5.1%. This paints a sorry picture knowing the fact that FDs and other forms of Debt instruments generate a paltry return of around 6% which gives us a positive return of 1% (rounding off the Inflation rate to 5%). And this rate of return is slated to go south in the coming times.

But, does the story end there. You bet it didn’t.

The Double Whammy of Tax

Benjamin Franklin once said ‘In this world nothing can be said to be certain, except death and taxes’.

If you think that a meager return of 1% was enough of a blow, think again. Interest generated by Fixed Deposits (FDs) are fully taxable to the extent of the Income Tax Bracket one falls into after adding the Interest component in the Total Income. Moreover, TDS (tax deducted at source) is deducted at the time interest gets accrued and credited and not when the FD matures. TDS currently stands at 7.5%.

The Net effect of this is if one falls in the highest income bracket @ 30%, negative return shall be generated as explained below.

Return from FD6%Inflation rate (RBIs estimates)5%30% Tax on the Return Generated via FD1.8% (=6%*30%)Net Return-0.80%

Most other Debt instruments have generated returns in the same range as an FD has plus or minus 2%.

Can it get worse than this?

Gold As a Form Of Investment

Our Love for Gold is eternal. We are one of the Largest hoarders in the world accounting for roughly 33% of the Gold mined. These figures are astounding to say the least. We must think long and hard as to why most countries purchase to a far lesser extent than we do.

The underlying reason for this humongous consumption is cultural. Buying this precious metal especially during weddings and festivities has been going on for eons and in all likelihood our hunger for Gold shall not die down anytime soon. It is passed on from generations.

The Average return that Gold has generated hovers around 10% over the last 10-year period. Even though this far exceeds the return generated from FDs, will the returns be of any significance to us considering the fact that Gold is hardly ever sold due to the emotional attachment it assumes.

Furthermore, Gold hardly has any industrial use and is mostly sold in financial stress. In effect, the return hardly ever fructifies.

Equity — The Best Investment Avenue (Over Long Term)

The current rate of return for the most popular Investment avenues is as highlighted below:

Investment Instrument5 Year Annualized Return*Fixed Deposit~5.5%Gold~10%PPF~7%Equity~15%

* amount of money the investment has generated per annum

Equity Mutual Funds historically have been offering far more attractive returns than any other Investment Product. Think about this, with an average annualized return of 15%, your money doubles every 5 years. Furthermore, Long term Capital Gain Tax is kept at 10% over and above 1 Lac which means unlike the case in an FD all gains (till 1 Lac) comes in your pocket. Keeping the inflation at 6%, the Net Return is a cool 9%.

Please remember the catch out here is Long Term i.e minimum term of 5 years. The more the better. More on this coming soon….

Upshot of The Discussion

There is little doubt that we have been and still are fascinated by risk averse Investment Products. Nevertheless, it is time for us to be enterprising and explore Equity as a form of Investment albeit for a long term horizon.

More on the World of Finance and Investment coming up in the next few weeks. Let’s keep learning.