Dear Mr. Gomas,
Thank you for
consulting with me on your investments. As we’d discussed last evening I
will proceed to explain why investing in Fixed Deposits would be better than
investing in Equities.
The primary
purpose of investing is to have money when you need it. These needs may vary
from person to person and time to time. But the basic principle as to
why we all invest is to have money when you need it.
When we look at
important events in our lives- buying a house, children’s education,
children’s marriage retirement etc it is important to have the money
required at the right time. By investing in a Fixed Deposit you can be sure of
the amount you will have, whereas in equity it’s a bit like a lottery.
Say you invested
Rs 1,00,000/- in January 2008 in a Fixed Deposit for your daughter’s
wedding in 5 years. Assuming 8% per annum as the yield your return today would
be- 1,46,933/-. Even with 30% tax the amount you would have in hand would be
1,32,853.
If you had
invested the same Rs 1,00,000/- in the Sensex, in January 2008 the Sensex was
around 21,000. Today, nearly 5 years on it is at 19,000! Your 1 lac would have
become Rs 90,476/-. In other words you would have suffered a loss.
Most equity
advisors say equity is a long-term investment. They never explain what a
“long term” is. Is 5 years not enough to plan for an event? Should
important events in your life- like a wedding or retirement depend on the
vagaries of the market? I wouldn’t depend on these investments for
financing my goals. A statistic that
is often quoted is that the index was at 100 in 1979 and today it is at 19000.
That gives you an annualized return of 17%. And the period is 33 years.
However, if we
look at the period from 1992- 2004 of the Sensex, on March 31st
1992 Sensex was valued at- 4253. It took until September 30 2003- Sensex at
4453- for the market to decisively break out from this high. That’s a
period of 11 years and 6 months. To me that would be a long term investment. There is an
interesting article on the subject here: http://articles.economictimes.
Since 2003, the
market picked up momentum and made money for everybody, up until 2008. But,
there was a long period before that where there were no returns at all. What
this tells us is that it is very important to ‘time’ the market.
And, even the market ‘experts’ will tell you that it is not
possible to ‘time’ the market.
Even the oft
repeated SIP mantra doesn’t apply to all time frames- Take for eg a Rs
1000/- SIP in the index from March 1992 to March 2002- a period of 10 years.
The reason why I chose March 1992 is that the market was at its peak (Harshad
Mehta’s time). A 1000 Rupee SIP would have returned only a meager 2% p.a.
yield- again highlighting the importance of ‘timing’ the market.
Then there is the
case of Japan
where the markets haven’t recovered for nearly 30 years! If 30 years is
not a long term then I’m not sure what is!
Please look at the
all-time historical graph above.
To read more on
the Japanese market crash.
One can make money
on the markets only if one has the skill to time the market. There is no such
thing as it’s always a good time to buy the market or an SIP is designed
to give you returns in all market conditions. It’s a game best left to
those willing to take the risk to play it.
It is always be
better to be safe than to be sorry. I would thus advise you to look to invest
in Fixed Deposits over equity.
I'll be
happy to answer any other queries that you may have.
Sincerely,
ARKNote: Sensex data from http://www.bseindia.com
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