Investing during low interest rates
Indian savers have always preferred safety over returns but that is fast changing due to low interest rates. What they miss out is the inflation aspect, for the first time after many years we actually have a positive real interest rate. No one but Warren Buffett explains this beautifully :
”If you (a) forgo 10 hamburgers to purchase an investment, (b) receive dividends which, after tax, buy two hamburgers and (c) receive, upon sale of your holdings, after-tax proceeds that will buy eight hamburgers, then (d) you have had no real income from your investment, no matter how much it appreciated in dollars. You may feel richer, but you won’t eat richer.” ( Full article here )
So this is what was happening to us earlier, We were happy getting 9% interest with a 8% inflation so our real return was just 1% but it does not end there we were paying taxes on the 9% so got only 5.9% ( at 33% taxes) return whereas inflation ate away 8%. We assumed that our wealth was growing safely when actually adding inflation and taxes we were losing money.
Lesson : Always aim for real return, which means post inflation, post tax,
So instead of ditching FD to buy equity funds because they give high returns ( but come with high risk too!) please check the real returns and the risk you can take.
Think in terms of investing a portion in different assets not just FD or if FD rates are down ( optically not in real terms) rush for equity funds chasing past returns. Asset classes are many it is never all FD or all equity MF !
Every asset has its place in your portfolio, just as we dont eat sambar rice 3 times a day 365 days a year. Ensure your portfolio has a good mix of fixed income for safety ( not returns, fixed income as we saw hardly beats inflation and taxes), Equity ( via equity funds for most of us) for real returns over long time periods. If we keep jumping from real estate to ULIPS to FD to equity mutual funds we can hardly make any meaningful returns.
Happy investing and Happy Onam.
Navin Said,
November 25, 2017 @ 7:14 pm
Buffets point agreed…but you havent offered a solution with conviction.
shankar Said,
December 19, 2017 @ 3:48 pm
Thanks for the comment Navin, Solution offered is asset allocation via equity funds, bonds etc to get positive real returns. Asset allocation is the best solution in my opinion. A 25 year old would need some debt just as an 70 year old would need some equity !