The basic objective of investing the money you save (apart from having a cushion for a rainy day) is to earn adequate returns that will help you beat inflation. This ensures that the purchasing power of your saved corpus remains intact. The returns earned on investment should be higher than the average inflation experienced in that period.
To illustrate, if my saved corpus of Rs 300 can buy me one cup of Starbucks coffee today, then even after 15, 25 or 35 years the same corpus must continue to help me buy at least one cup of Starbucks coffee, if not more.
Hence, we should look at earning inflation-beating returns on our savings and investments.
Where should you save?
All of us who save, invest broadly in the four asset classes apart from cash/liquidity for some contingency:
- Real Estate
- Gold
- Fixed Income (fixed deposits, bonds issued by Government and Corporates, fixed income mutual fund schemes)
- Equity (direct buying of stocks, equity mutual fund schemes)
While choosing these investments we have to ensure that the potential POST-TAX return is higher than the projected inflation that we will experience in the future. We cannot ignore the tax impact on the returns of our investments as tax will take away a reasonable chunk of your investment if not planned smartly.
Let’s take a look at how the above mentioned asset classes have given pre-tax returns as compared with the inflation experienced in India in the past 15-odd years, as mentioned in the table below:
|
Particulars |
01-Year Returns (%) |
05-Year Returns (%) |
09-Year Returns (%) |
13-Year Returns (%) |
17-Year Returns (%) |
|
Debt Fund |
10.4% |
8.5% |
8.7% |
8.2% |
7.4% |
|
FDs |
6.3% |
6.9% |
7.6% |
7.5% |
7.1% |
|
Gold |
34.9% |
12.3% |
9.2% |
12.9% |
13.1% |
|
Equity Fund |
2.6% |
5.8% |
6.6% |
8.0% |
14.1% |
|
Global Equity |
25.6% |
12.7% |
16.9% |
10.8% |
10.5% |
|
India Inflation |
6.18% |
4.50% |
5.92% |
7.13% |
6.75% |
Data Source: AMFI / RBI
As depicted in the higlighted data above, unless one had a meaningful portion of savings in equity and gold assets, it would have been difficult to earn returns higher than inflation.
Asset Allocation and the Indian Household
When we look at the asset allocation of a typical Indian houselhold, we see that a very small portion is allocated towards inflation-beating assets (refer to table below).
|
Year |
Real Estate |
Provident & Pensions Funds |
Insurance Funds |
Bank Deposits |
Gold |
Equity |
Cash |
|
Mar-06 |
55.4 |
5.9 |
4.7 |
14.5 |
12.1 |
3.9 |
3.6 |
|
Mar-07 |
53.5 |
5.5 |
4.8 |
15.3 |
13.6 |
3.9 |
3.5 |
|
Mar-08 |
53.1 |
5.2 |
5.2 |
15.8 |
12.7 |
4.5 |
3.5 |
|
Mar-09 |
53.6 |
4.9 |
5.4 |
16.0 |
14.3 |
2.4 |
3.6 |
|
Mar-10 |
52.4 |
4.7 |
5.7 |
15.2 |
14.7 |
3.8 |
3.4 |
|
Mar-11 |
52.1 |
4.6 |
5.7 |
15.2 |
15.4 |
3.5 |
3.5 |
|
Mar-12 |
52.1 |
4.2 |
5.5 |
14.6 |
17.5 |
2.8 |
3.3 |
|
Mar-13 |
53.1 |
4.1 |
5.3 |
14.3 |
17.6 |
2.4 |
3.2 |
|
Mar-14 |
55.0 |
4.1 |
5.3 |
14.5 |
15.6 |
2.5 |
3.1 |
|
Mar-15 |
56.9 |
4.1 |
5.4 |
14.4 |
12.9 |
3.1 |
3.1 |
|
Mar-16 |
55.7 |
4.5 |
5.6 |
14.7 |
13.2 |
3.0 |
3.3 |
|
Mar-17 |
55.1 |
4.8 |
6.0 |
15.6 |
12.5 |
3.6 |
2.4 |
|
Mar-18 |
53.9 |
5.0 |
6.1 |
15.4 |
12.5 |
4.0 |
3.1 |
|
Mar-19 |
53.1 |
5.1 |
6.3 |
15.8 |
12.2 |
4.1 |
3.4 |
|
Mar-20 |
51.1 |
5.1 |
6.2 |
15.8 |
15.3 |
2.9 |
3.5 |
|
Dec-20 |
48.4 |
5.1 |
6.1 |
15.7 |
16.9 |
4.3 |
3.6 |
| *Source Jefferies | |||||||
Hence, it is extremely important that a significantly large percentage of your savings or investment corpus is invested in inflation-beating assets. And it should stay like that for your entire life.
From a global standpoint, we can see from the tables above and below, investment by Indians in equities is quite low even when compared with other countries.
Table of Indian household allocation to Equities vs US/China/Others
|
Country |
HH equity exposure as % financial assets |
|
US |
45.5% |
|
Spain |
42.0% |
|
Canada |
37.9% |
|
China |
28.8% |
|
France |
28.1% |
|
Russia |
26.6% |
|
Italy |
21.8% |
|
Germany |
21.4% |
|
Taiwan |
20.0% |
|
Australia |
18.6% |
|
South Korea |
18.1% |
|
UK |
16.0% |
|
Singapore |
15.1% |
|
Japan |
15.0% |
|
India |
14.0% |
*Source: Motilal Oswal (2019 report, data as of 2019)
To sum up:
- Choose investment options after considering the tax impact on returns on investment
- Potential post tax return should be higher than projected inflation in the future
- All of us should have a reasonable larger allocation to equities as part of our corpus. Whether you invest in direct equities or via mutual funds is a separate discussion but larger allocation to equities is a must.
