Insights

Risk associated with risk-free investments

July 23, 2018 . Gourav Kumar

Over the past decade, financial services have become increasingly easily accessible. From bank deposits to mutual funds, from equities to insurance, all are now available online. While KYC norms still create some pain, the procedures themselves have gotten simpler.

Even so, Indian investors remain enamoured with risk-free investments. Putting money in the bank gives investors a sense of safety. After all, who wants to take risks with their hard-earned money? This sense of safety arises from familiarity. Young graduates entering the workforce, have grown up knowing only fixed deposits and LIC from their parents. Our parents may have a deep distrust in the government, but still trust government-owned corporations that handle their investments. Hence they want to put their money in these seemingly safe avenues.

What the current generation nor their parents realise is that modern living comes at the cost of shelling out more than what is in your wallet. The rate at which the gadgets we use are replaced by us is not an expense that our bank balances will support. While the savings in your bank chugs at 6-7% per year, prices of many essentials zoom faster than thatevery year. Your dream Europe tour and the retirement home with a garden at the back slip ever farther away. And suddenly, you find yourself scrambling to augment your retirement corpus at the age of 50, by cutting down on the Saturday night outs.

But all this doesn’t have to be. A little bit of planning can put your money on steroids. And while the Olympic committee might frown on performance enhancing drugs, this method of earning money is perfectly legal. And you face a serious threat of being left behind if you don’t take adequate measures now. How serious can it get? Look at the illustration below to know.

Consider friends, Prabhu and Mahesh. The duo, who had been friends since school, retired on 31st March, 2018. Prabhu, the son of a lifelong public sector bank employee, had full trust in government institutions. Mahesh was born to an economist father. Having learnt economics from childhood, he had trust in capitalism. Consequently, Prabhu invested his money in PPF while Mahesh went all out and invested his money in mutual funds. Leading a similar lifestyle, Mahesh estimated they would need around 3 crore Rupees for retirement. Both of them invested Rs. 1 Lakh at the beginning of each financial year since 1997. This is where they ended up:

value of investments in risky and risk-free investments
Returns are based on a 50:50 allocation between HDFC Top 100 fund and Franklin India Prima fund. These funds have been considered for illustration purpose only and should not be considered as recommendation.

Mahesh used 15 lakhs out of the extra 60 lakhs he had accumulated for a post-retirement Europe tour with his beloved wife. Prabhu sat wondering how he was going to get through his retirement.

At first glance, the difference looks too good to be true. The corpus accumulated in mutual funds is more than 6 times that of PPF. However, before dismissing it as farce, we need look at the annualised returns. The annualised returns are 8.75% in PPF and 22.1% in mutual funds. The figures now start to look more believable.

Of course, the returns in future may not follow the past trends, return in equity will come down, but so will the return on PPF. The difference in corpus over the next 20 years may also be smaller. But if the past is any indication, you will miss out if you do not invest in equity.

Putting your money in banks may keep your money safe, but can put your retirement plans in jeopardy. By not taking risk with your investments, you are taking risk with your financial goals themselves.

This article first appeared in DNA’s print edition on Thursday, 19th July, 2018.

Comments

Get FundsIndia’s articles delivered straight to your inbox!

Enter your email address to get:

  • Mutual fund recommendations from experts
  • Buy, hold or sell calls for stocks
  • Investment tips and tricks
  • All the latest news from Fundsindia.com

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.