Playing it too safe?
The most important financial question that an Indian professional has to ask is: Am I playing too safe? Most probably, You are.
The most dangerous thing an investor can do is to play too safe. When you buy a fixed deposit or insurance investment or infrastructure bond and feel happy that you have a guaranteed Minimum return, you often don’t realize that you have also bought yourself a Guaranteed Maximum Return. It is a very expensive thing to miss. You are all skilled at calculations. So I will show you the math straight.For the most important case study of your life, read on.
Do the Math
If on the day you joined work you put in Rs. One lakh in a fixed deposit, then on the day you retire exactly 40 years later an 8% fixed deposit will give you Rs. 8 Lakhs. Since you guys do the math: this number is calculated as (1+8% x (1-32%))^40. Remember the 32% income tax. Even without tax, this sum will be Rs. 22 Lakhs at the end of 40 years.
Now, consider a different choice. If on the day you joined work, you put in Rs. One lakh in a diversified Equity Mutual Fund, then:
If stock markets give average returns of around 12%, you get Rs. 93 lakhs from the Equity Mutual Fund. Equity Mutual Funds have ZERO tax. This number is (1+12%)^40
At good 15% stock market return you get huge additional profits because Mutual Fund gains do not have a Maximum limit. At 15%, the sum is Rs. 2 crores and 70 lakhs.
At fantastic 20% stock market returns you get Rs. 14 crores and 70 lakhs. Note that 20% isn’t a random fantasy. It is the actual historic average return of good Equity Mutual Funds in the last 15 years (to Feb 2014, See: http://www.morningstar.in/mutualfunds/f0gbr06rou/hdfc-top-200-fund-growth/performance.aspx.)
The fixed deposit will never do better than Rs. 8 Lakhs. Never. It is held down by a Guaranteed Maximum Return and taxes. Playing it safe is the biggest danger you face. Investing in equities is the single most important financial decision you can make in your life. Write to us at spheregreen.investments@gmail.com to invest.
