Those who invest in us usually have growth in our minds. But why do we want our money to grow? The obvious answer is that what you invest should become “more”.
Not only are we looking for “more”, but we also want this growth to be as fast as we believe it is good. This is where the returns come in. The higher the return on investment, the faster your money will grow. We are very happy to see our equity investments giving double digits in a year. We get angry when we see negative returns next year. This sea-so also asks how to look at returns.
We hope you find out exactly why you need returns before investing. The answer to this question is what to invest in and what determines your basic return expectation from that investment.
Why do you and I have to come back?
Simply put, the primary reason you need returns is to make sure you do not lose the value of what you are saving. It should rise at a rate more or less equivalent to inflation.
In the short term (less than 5 years), our money increase is usually work related to our salary or income growth, which depends on other factors. Some of these are under our control, some are not. You definitely have more control over these “returns” than any financial market can offer.
In the long run (10 years or more), your savings will be largely affected by inflation. To protect yourself from it, you need to give your money and confidence a chance to overcome inflation.
Something in this situation is the Indian economy. One thing is for sure. Now anyway, there is a great opportunity for the economy and companies to grow rapidly to overcome the rise in commodity prices. History shows it.
Something in this situation is the Indian economy. One thing is for sure. Now anyway, there is a great opportunity for the economy and companies to grow rapidly to overcome the rise in commodity prices. History shows it.
The Sensex (which is a good proxy for Indian companies) has grown by 12% -13% CAGR over the last 19 years. Inflation (CPI) has been at 5% or less in recent times.
Inflation in India has fluctuated over the last two decades but has rarely crossed the 15% mark (highest). If long-term inflation is in the range of 7% -8%, Sensex’s expected equity returns beat inflation by a sufficient margin.
Since most fixed income instruments rely on interest rates set by the Central Bank (RBI) regulators, returns on FDs and other debt instruments can be as high as one or two percent above inflation. When considering taxing interest income, you often get less income than inflation. The chart below shows how liquid funds have worked against inflation, giving an idea of FDs (pre-tax) and what else can be achieved.
All of this means that the income you desire is basically achieving two basic things.
- If you want to accumulate wealth or find the money for big goals like retirement or your child’s college education, income should be higher than inflation.
It is subject to the return of the most accessible and liquid asset class with a history of overcoming inflation. Defeating inflation does not happen overnight (unless you like gambling), because it takes at least 7-10 years for equity to pay off the returns imposed by inflation.
- For your final corpus amount they should take into account how much you need and how long you can invest.
Keep in mind the risk you are willing to consider for returns. As many investors have found, the higher the return they expect or desire, the lower the return rate. We know that equity has beaten inflation in the past. Other asset classes such as gold and real estate occasionally do this but have problems of their own.
To summarize:
Returns should be based on reality and data rather than what we “wanted”. If we want to invest one lakh every year and raise one crore in five years, we can start a business with that money and expect it to really start, because it is the only way to create an 80% plus CAGR in a better situation. .
You should also look at your time period. In the short term, the security of your savings is more important, so look no further than fixed income-based investments such as FDs or debt funds. You can consider property classes that will overcome inflation only if you wait 7-10 years and you have an important goal in mind. Finally, do your part to achieve a goal for your investment, because, without a goal, any return rate will look bad.
