Did you know 95% of Indian households invest their hard-earned money in physical assets like real estate and gold, primarily because of the following reasons:
- These are tangible assets that we can feel and be happy about holding
- We invest with a long term view assuming these are safe investments and will provide decent compounding on returns
- We have seen our parents investing their savings in physical assets over their lifetime
These physical assets over the last decade or so have not been able to even beat inflation, resulting in the compounding of investments at a rate lower than inflation, thus depleting the investment corpus systematically year after year.
When I say financialisation of savings, it means changing our mindset from investing in physical assets to financial assets. Financial assets will include investments in equity (stocks), either directly or through mutual funds, fixed income assets to include a bank/corporate fixed deposits, Post office schemes, Government of India bonds, etc, and other debt instruments. Although insurance may also be considered as a financial asset, it is primarily to cover the risk of life and not an investment option. For more on insurance-related investments, kindly read my article on my blog at https://letsinvestwisely.com/should-you-invest-in-insurance-related-products/
While investing in financial assets, mostly preference is given to invest in fixed income assets as these are considered to be risk-free and safe. In today’s scenario, fixed-income financial assets are providing annualised returns ranging from 5% to 7.25% pre-tax and post-tax in the range of 3.5% to 5% with 30% taxation. The government of India 10 years bond, safest among all the fixed-income assets, is providing around 6% of annualised yield which works out to be 4.2% post-tax. With inflation hovering around 6%, we are actually depleting our investments by approx 2% year on year systematically which over a period of 20 years will erode our asset value by 50%.
On the other hand, if we want returns better than inflation, we need to take some amount of risk in an intelligent and conservative manner to augment our wealth creation. And to achieve this, there is no better asset class than investment in equity, either directly or through the mutual fund. It is perceived to be a highly risky and volatile investment option and most of us tend to stay away from it. Yes, by nature, stock markets are volatile and risky for the short term but over a longer period of time, both volatility and risk factors are almost non-existent. Despite many stock market crashes over the last three and half decades, BSE Sensex has risen from 100 to 52000 thus giving 13.68% compounded annualised growth.
- Mode of savings should be changed from physical to financial assets; it’s easier to manage financial assets besides getting better returns
- Risk-free financial assets will give annualised returns in the range of 5% to 7% pre-tax. Avoid investing in fixed income assets offering 8 to 9% annualised returns
- Start investing in equities (stocks), preferably through mutual funds, to get better returns than inflation to compound your wealth. Please remember, India is changing from a socialist economy to a market-driven economy and we as a country have a long growth story ahead of us.
- If you find it difficult to manage investments yourself, please take professional advice and consult a financial planner.
Need to talk more about this or any other issue related to personal finance? Please feel free to call or book a no-charge consultation with me on this link. (https://calendly.com/rakeshgoyal) Confidentiality is assured.
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