I usually do not write on Personal finance topics barring a few jibes at baloney products like ULIPS and Child Plans. But my friend and Partner at MysticWealth, Dayanand Deshpande @dayadeshp suggested that majority of our target audience has their money “invested” in fixed deposits, so it would be nice if you channelize your wandering gun (pen) and write something meaningful for a change.
So as far as fixed deposits Vs equity investment is concerned, my personal view is that
“Risky might or might not be safe but safe is definitely Risky”
Let us break it down. Conventionally, fixed deposits are considered a safe investment. The reason they are considered safe is because there is a sense of ‘predictability to it’. You exactly know the amount you would get at the end of the tenure. The odds of you not getting your due are very rare. (a case of bank run may be or a country going bust)
So predictability of return makes your money ‘safe’ or does it!?
Important question to ask here is “Safe from What”!!???
What is the value of money and what are we essentially protecting (safe guarding)? If you think about this question, you would come to a conclusion that money has only one utility, (apart from an ego kick) which is ”Purchasing power” it gets you stuff you want in exchange.
So safe guarding money = safe guarding the purchasing power isn't it.
The next obvious question in this simple puzzle is, how is purchasing power calculated and how does it appreciate and depreciate with time.
What is the value of let us say 1 crore today and what was its worth a few years ago. To get the answer to this question, we have to go back in time. What all could your Dad buy if he had 1 cr back then ( let us say 1997)
Let us look at different things to draw a conclusion as a one off example can have an outlier effect of that Asset class being in favor more than average.
I can show you graphs and figures to bring home the point but that is not necessary. We are not discussing the magnitude of depreciation your money goes through.
Simple invert mathematics would tell you that MONEY LOSES value over time.
The reason is ‘Inflation’, it corrodes into your corpus just like termite (deemak) does to woodwork.
So, let us come back to our topic, Safe is Risky.
When you safe guard your money into a fixed deposit, you are doing the worst possible thing you could do with money.
Today, you can buy 02 movie tickets along with a big tub of popcorn and coke with your Rs 1000/ . Let us say you put it in fixed deposit and after 3 years they return you Rs 1260/ (8% per annum compounded annually)
You think your safe investment gave you a return RIGHT.
WRONG. Now with these Rs 1260 you will not be able to buy 02 movie tickets leave alone popcorn and coke. The price of goods (due to inflation) move much faster than the rate at which your FD multiplies your money.
It is a famous RED Queen Effect as mentioned in Alice in Wonderland.
Or try and picture a man trying to climb the escalator while it is going down. If he runs at FD (fixed deposit) speed he will go down. If he runs at inflation speed, he will remain where he is. Only if he runs faster than inflation, would he be able to move up the escalator (life).
Now that we are clear about RISK in being SAFE. Let us move this conversation forward to its logical end
So what moves faster than inflation??
Instead of me answering this question, it would be nice if you do this thought experiment yourself. Look around your neighborhood and see how have rich become rich. Surely, Not by putting their money in Fixed Deposit.
02 ways majority of people have accumulated wealth is A) Business and B) Real estate. Both of these asset classes have run faster than inflation.
If you do a further segregation, you would also notice that Real estate riches is a recent phenomena, our grand father did not become that rich with real estate compared to our dad. Secondly, our dad and now we are seeing reversals even in real estate.
Bottom-line is that the best way to beat inflation is to do a successful business with decent margins and growth bigger than inflation and if you cannot do that, second best thing to do is to invest (Secondary market, also known as share market) in a business and be part of its growth.
So there you have it, by Investing in businesses, there may be a risk of losing your capital, however it comes with an optionality of creating serious wealth, compounding at much faster rates than inflation compared with fixed deposits where you are certain to not lose your capital but you are also certain that you NEVER beat inflation and in the process corrode your net worth.
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