If you are one among the 99% of investors who have “security” as the number one deciding factor in opting for an investment scheme, then, what I am going to reveal will be startling for you!
When an investment scheme is marketed, one of the most prominent words used to sell it is “secured”. Does the fact that a scheme is “secured”, also mean that it is profitable? Do you think you gain more from such investments?
Have you ever thought how much potential gain such investments curb to sell the scheme as “secured”? What if you spend more to prevent yourself from an imaginary loss that is much less expensive in reality?
Table Of Contents
1.) Investment VS Purchasing Power:
2.) Savings VS Investment:
3.) The Price of Security:
4.) Security: Shield or Shackle?
5.) Investment For Purchasing Power:
6.) Guaranteed Policies: Is the Guarantee Assured?
7.) What is the Right Protection?
8.) Conclusion
1.) Investment VS Purchasing Power:
The words “safe investment” and “Guaranteed Returns” are like honey to the ears of an investor. The assurance that the principal and interest are guaranteed in this investment can create a sense of great relief in your mind.
But are you aware that you are paying a huge price, albeit indirectly, for that peace of mind and the assurance of security?
2.) Savings VS Investment:
A safe plan can only be a good savings plan, but not a good investment plan. Savings plans are more concerned with protecting your principal and the income you earn. At the same time, it does not protect the purchasing power of the principal and income.
If the price of an item is ₹1 lakh today, it will cost ₹1,06,000 to buy that item after one year due to 6% inflation. If we deposit ₹1 lakh in a bank today, we will get ₹1,08,000 at an annual interest rate of 8%. If you are in the 30% tax bracket, you will have to pay ₹2,400 as tax. After paying taxes, the remaining amount is ₹1,05,600. The price of the item has increased to ₹1,06,000.
Our savings have grown to only ₹1,05,600. Our money has lost its purchasing power.
Only the plans that give additional income by overcoming inflation are real investment plans. In such investments, Mutual Funds, stock investments, and real estate pay more attention to protecting the purchasing power of money. Therefore, such investments do not take cognizance of any temporary or short-term shortfalls in the principal or income. The main feature of these is to increase the purchasing power of money in the long term.
3.) The Price of Security:
PPF is a safe investment that offers an annual interest rate of 7.1% at present. PPF is one of the investments guaranteed by the government. The features of security, guarantee, and tax exemption on interest are very attractive to investors.
If an investor had invested ₹12,500 per month in PPF for 15 years, he would have received ₹39.9 lakhs at the end of 15 years. If the same amount had been invested in an equity Mutual Fund, instead of a 7.1% return, an income of approximately 12% would have been earned. Based on this, the value of the equity Mutual Fund investment would have been ₹62.4 lakhs at the end of 15 years.
Even after paying capital gains tax, the value of the investment would have been ₹58.4 lakhs. We would have received additional income of ₹18.5 lakhs compared to PPF.
To avoid the discomfort of market risk and to embrace the conveniences of security and guarantee, we have paid a price of ₹18.5 lakhs in this example.
Do we realize that we have bought security and guarantee for such a high price? Does the price we pay indirectly for security seem too high?
4.) Security: Shield or Shackle?
Insurance policies that offer Guaranteed Returns of 5% to 6% are widely sold in the market. We have been brainwashed to see such policies that offer guaranteed income for the next 20 years, 30 years, or even a lifetime as a gift.
Let’s say someone has saved one crore rupees for retirement. If he invests that amount in such a guaranteed return policy, he will get an annual return of 5.5%. This means he will get a monthly income of ₹45,833.
In the beginning, that income may seem sufficient for your expenses. But due to inflation, expenses are rising at least 6% every year. In that case, the amount required to meet the expenses will increase to ₹65,000 after six years, ₹92,225 after 12 years, and ₹1,30,822 after 18 years.
While our expenses are rising due to inflation, the cost of living is rising, and our expenses are rising, we are only getting a fixed ₹45,833 from the policy, “securely and guaranteed.”
Today, we see “security” as a bargain, and we lock up 1 crore rupees in a policy without thinking. The income will not go up until the policy term expires. It is also not possible to withdraw the first 1 crore if needed.
These policies tie our hands in such a way that we cannot even spend money on an emergency even though we have money.
Now tell me, are these policies a shield or a shackle for you?
Such investments earn a secure income. At the same time, it is not possible to protect the “purchasing power” of the income. The income from investments does not rise to match the purchasing power. That is why the investment that we feel as a shield, in the beginning, turns into our shackles in the future.
5.) Investment For Purchasing Power:
How to invest to deal with inflation and price increases in retirement?
If you have ₹1 crore rupees as retirement savings, you can invest ₹70 lakhs in fixed deposits or postal savings schemes that offer 7% interest. This will give you a monthly income of ₹40,833.
Although Mutual Fund investments are subject to market risk, the fluctuations in the market will only affect your investment in the short term. In the long term (5-7 years), equity bonds have generally given 12-13% returns in the past. Therefore, you can liberally invest a portion of your retirement savings in equity funds.
If you invest the remaining ₹30 lakhs in an equity Mutual Fund that earns a 12% annual return, its value will increase to ₹60 lakhs in 6 years.
If you take out the profit of ₹30 lakhs from this, and add it to the ₹70 lakhs you already have in the deposit, you will be able to hold Rs.1 crore only in fixed deposits in 6 years. This will give you a monthly income of ₹58,333 instead of ₹40,833. The additional ₹18,000 will help you deal with the price increase.
The remaining capital of ₹30 lakhs, after taking out the profit of ₹30 lakhs, should be left in the equity Mutual Fund. Then it will again increase to ₹60 lakhs in the next 6 years, that is, at the end of 12 years. You can then add another ₹30 lakhs to the deposit.
At the end of 12 years, on this basis, there will be ₹1.3 crore in the deposit. The monthly income from this will have increased to ₹75,833.
This is a strategy that protects the purchasing power of the income that was initially ₹40,833, and then ₹58,333.
In addition, since your capital is also in deposits and Mutual Funds, you can also liquidate them in case of emergency. Your capital is not “locked”.
6.) Guaranteed Policies: Is the Guarantee Assured?
Guaranteed policies are sold in large quantities in the market. Many people invest in policies without fully investigating whether there is a guarantee for income. Later, they realize that the income is lower than what was initially said and they investigate.
Only then did it become clear that they were tying the policy around our heads by showing the guaranteed benefits along with the non-guaranteed benefits. Therefore, we should clearly understand what is guaranteed and what is not in such policies.
7.) What is the Right Protection?
If you do not know how to manage your stocks or Mutual funds and do not have contact with a suitable Mutual Fund distributor and financial advisor, then, if necessary, savings plans that protect income can be accepted as sufficient without any other way.
8.) Conclusion
Safe investments are not always the best investments. They can be the worst investments if they do not protect your purchasing power.
For most of us, investments that protect the Purchasing power of income are appropriate and essential.
Let us reject savings plans that only protect income and welcome investments that generate income that protects Purchasing Power.
Leave a Reply