The more I write and the more I communicate with people new to finance, the more I realise the need to ‘de-jargonise’. However I am also convinced that if you need to use your money, it is necessary for you to learn simple words like inflation.

With Wikipedia, Investopedia and Google around, I do not want to get into ‘what is inflation’….suffice it to say it is NEGATIVE compounding and can harm your portfolio.

If you have to make your money work hard for you, your PORTFOLIO has to give you REAL returns. REAL returns means the returns that you get AFTER TAXES AND after reducing inflation.

Let us take an explanation of a ONE year return (it holds true for the longer term also).

Suppose you keep a bank fixed deposit of Rs. 10,00,000 at a 10% p.a. return, your calculation would look like this:

Opening balance                                                                              10,00,000

Interest income:                                   100,000

Taxation      (assuming 30%)               30,000

Post tax return                                                                                          70,000

Closing value                                                                                       10,70,000

Inflation (assuming 8%)                                                                         80,000

Closing value of the amount                                                            9,90,000

So thanks to tax and inflation the portfolio is down by 1% over a period of ONE year.

Over a 30-40-50 years this can ruin your wealth.

So it is necessary that the portfolio return overall be POSITIVE. Fairly obviously savings bank accounts, bank FD, Lic endowment policies …can ONLY return NEGATIVE returns.

To make up for this…you need to invest in equities (and enough quantity) so that your OVERALL return is in the POSITIVE areas….


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  1. Dear Bharat

    yours too is a one sided story. Check 5 year returns of the same (lumpsum or sip) which will give you a different story. Most of the equity advisors have rewritten the “defenition of long term” from minimum 3yrs to 5 years and currently Advising 7-10…. :). Hope their customers too have the patience.

    I am more than happy if the FD(or tax free intruments) is atleast beating the inflation.
    I am more than happy if my real estate is returning 2-3% compunded over inflation (have locked for min 5-10 yr)
    I will be really excited if my inverment in market is returning 5-6% compounded over inflation

    Last year the inflation was 10% and the best fixed income products were returning less than that.

    The problem i feel is i consider to be in the lucky 1% to know/ learned “something” about investing. But the 99% countrymen dosent. Moreover the government nor the regulators seems least interested in creating simple products and simple rules for people to believe in these basic principles of investing and financial planning.

    Mrhdk…. “Buffet kaa baap”…. What a strike -out of the biggest stadium. :). Have a great day.

  2. Subra,

    My take is “you need to invest in equities (and enough quantity) ” learnt it in very bad/hard way…..

  3. it is amazing to see people looking at the equity market. It is like 6 blind men looking at an elephant.

    Volatility is NOT the problem. The fact that you NEED to sell when the market is down is a problem. There is no rule which says ‘3 years is long’ or ‘7 years is long’. Equity market is not a pet dog on a leash. Take a 7 year rolling return or a GROWTH option SIP it will be very very difficult job to find a period when fixed returns have beaten equities, if at all. Even assuming you can find it, it does not mean anything. The probability of debt beating equity on an SIP basis over 7-10 years is low.

    anyway, let me repeat, these are my views. You can do what each one wishes to do…..have fun in the process.

  4. Moral of the story is “any investment should yield post -tax real return”.
    As far as Equity Mf, my analysis from peak of 2008 till arp2012
    quautum,idfc premier,icici discovery,hdfc balanced,Prudence have given 9/10% CAGR on lumpusm investment.

  5. @shinu

    i checked the performance over 5 yrs. (bet. dt.1-6-2007 to dt. 31-05-2012 for the mf mentioned in my earlier comments. however here the figures are gain in %age compounded over 5 yrs. period:
    bsl div. yield plus- 11.39% ,icicipru discover-10.88%
    idfc premier equity-15.17%,
    quantum long term eq.-9.72%, icicipru dynamic-7.4%
    uti div. yield-10.59% ,hdfc equity-8.39%
    templeton india eq.income-6.73%, hdfc top 200-9.26%
    sensex-2.77%, nifty 50-2.77%, bse midcap-(-)1.03%
    my only take is for laymen, investing in selected diversified equity funds is a good idea.

  6. Subra sir

    I dont think nor pointed that you have ever mentioned “long term” less than 7 years. But many well reputed have.

    To put it more openly it was dhirendra who did guide many to MF investors in india. But his defenitions and guidance stand questionable for me now. It took over 4 years to clear out 11 out of the 12 funds from the portfolio and rebalance it to what i am more confident of now. it was all from his reccomended ones but their performance in non comparable now. What to do – started too late… :(.

    @ bharath

    The compounding works best if your initial years of investments are returning the best. so the 5 year returns are so pathetic the impact it have on your corpus after say 20 years is HUGE. Also after another 5 years (for the defenition of 10yrs = long enough to look good) if this investment to show a decent 12-15% return the market should be making unprecedented moves in the coming years to lift it from it current 2-5%. Hope you got the point.

  7. Subra,
    Regarding debt returns, applying 30% bracket as rule of thumb is not proper way. Most of the tax payer do not fall under 30% tax bracket. However, I am agree with your important rational on investing part of portfolio in equity(I am comfortable with MF in good diversified funds)

  8. I was very happy with my LIC policies till I came in acquaintance with a not so gentleman named Inflation 😉

    Thanks Mr. Subra for putting it in simple terms.

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