Last week, we looked at how to measure returns. In that, we mentioned the fact that interest rates on fixed deposits are falling. This trend will continue. In such a scenario, as an investor not looking to take risks, what are your options?
In India, most households prefer to invest their money in fixed deposits. And when you are faced with returns of 6-7% per annum before tax, which translates to less than 5 % after, this is definitely cause for concern.
When inflation hovers at 4-5%, it makes little sense to invest in a fixed deposit. You need to put your money in something that gives you a real rate of return (interest minus inflation) that is higher.
what is secure like a fixed deposit and gives better returns? Is there anything?
FACT: When there is a shift in the economy, in which the rate of inflation is going to be lower than five percent, lower interest rates on fixed deposits are part of that reality. This is happening in India.
How have Indian investors responded to this?
Our research has shown that during the past year, there has been a gradual and definite shift towards investing in equity. The reason for this is clear: the right equity investments deliver better returns…much better returns, especially in the long run.
That said, not everyone has the stomach for the risk that is inherent in equity investments. What can such investors do?
Simple answer: Yes. But how can a risk-averse investor be persuaded to see merit in taking a few calculated risks?
Knowledge, awareness and positive experiences can help change attitudes towards Risk Gradually.
To earn better returns, say around 8-10% on an average for your portfolio, there is no alternative but to participate judiciously in equity. And the prudent way is to consider beginning your journey into this avenue by investing in funds that have a lower equity component and a good track record. Mutual Funds is one reliable vehicle: professionally managed, very transparent and highly regulated in India.
“Risk comes from not knowing what you are doing.” – Warren Buffet.
You can plot your needs in short term, medium term and long term buckets and plans to invest long term funds in equity asset class. Equity assets have always delivered better tax adjusted returns in long term. Numbers shows that real estate and gold too has not delivered in longer terms compared to equity, this may sound contrary to general belief.
Choose a financial advisor you trust (and with a good track record) and let them assist you make the right moves.
A good financial advisor will understand your needs, take into consideration your goals, be sensitive to your appetite for risk, and help you invest in funds that deliver returns to meet your short, medium, and long term needs.
Finally, a good financial advisor will show you that a relentless fall in interest rates on fixed deposits is not a cause of concern and that you can earn better returns than ever before when you are armed with knowledge and experience.