Dear Mr. Gomas,
Thank you very much for sharing Mr. ARK’s mail with me. It
was a very informative piece and I appreciate Mr. ARK’s efforts.
One is wealthy when one has more than one requires. If you require Rs 1,00,000 and you have
5,00,000 you are wealthy- plain and simple.
Mr. ARK has strong and valid points. However, he has ignored
something very important which I would like to highlight by means of a story.
Mr. Natwar sold a piece of land and made Rs 1,00,000/- in
1996. I’m sure you will agree that 1,00,000 was quite a sum in those days. He
had no requirement for the money immediately. He decided to ‘invest’ the money
for his daughter’s higher education in 16 years by investing in a bank FD.
Fast-forward to 2012 and Mr. Natwar’s corpus is around Rs 3,42,600/-
(@8% compounded p.a. and non-inclusive of taxes). The corpus has more than tripled- smart
investment it would seem. So what is the value of this investment in present
terms? Mr. Natwar can still afford his daughter’s education but maybe not the
best as he would have liked.
In 1996 Mr. Natwar was wealthy- but in 2012 he just about meets
his requirements. In other words Mr. Natwar’s wealth has remained the same or
decreased. Inflation has eroded the more than three time jump in his corpus.
FD’s are investments that
protect your wealth, not grow it. This is fundamental to understand. If you
want to remain in the same place then yes- invest in FD’s. Makes sense as there
is no risk. But if you want to grow your wealth- then we have to look at other
alternatives.
Equity, real-estate and gold are assets where there are no fixed
returns. No one can say what the value of these assets will be tomorrow, in 5
years or in 10 years and that is exactly what the risks are with these
investments.
I will cite real estate and gold as examples as I go further. You
may be more familiar with these assets. Gold
has moved up considerably over the past few years. But, had you bought gold 3
months back @Rs 32,000 per 10 grams (on 14/9/2012) then today(@ Rs 31,455/-)
you are sitting on a loss. With real estate too we have a similar story. Prices
have remained more or less stagnant for the past 2-3 years. Had you invested 2
years back and were selling today you won’t be making much of a profit if at
all. Everyone is buying on the assumptions that these assets will move up. But,
when and by how much we cannot say.
This is exactly why we call these ‘long-term’ investments. Had Mr.
Natwar invested his Rs 1,00,000 in gold, real estate or even in equity- he
would have made much more than what he made through FD’s. But, there is the
risk of not knowing what returns he will get and when he can/should sell. It
might be that when he has his requirement the asset might not be properly
priced. He will have to be smart and sell when he gets a good price. He might
need advice for this. And that is what exactly I’m here to provide him.
The rewards for being able to accept risk and plan around it are
well worth it. An investor has to understand this fundamental insight without
which no investment is possible. If you want to grow your wealth you will have
to take some risk. If you are content with your wealth and are comfortable with
the knowledge that there is the possibility of it being eroded due to inflation
then FD’s are the ideal investment for you.
Mr. ARK has quoted the case of Japan. Along with equities the
prices of real estate have also came crashing down.
Japanese asset price bubble- http://en.wikipedia.org/wiki/Japanese_asset_price_bubble
Gold also was on its way
downward in yen terms till about 2000, when globally the prices of gold started
to increase.
This is precisely why we had the depression in Japan. The economy
shrunk because of the fall in value of assets. A bank FD in Japan currently
yields 0% (Please check graph below).
I’m sure you won’t consider that as an
investment for wealth creation whatever the circumstances.
I hope this has cleared
your understanding of what an FD is and where it stands in respect to other
asset classes. I’ll be happy to clarify your doubts.
Sincerely,
K
Recommended reading for further understanding:
Please read Mr. ARK's mail here- http://thefinancialreview.blogspot.in/2012/12/fixed-deposits-vs-equities.html
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