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Wealth Special: Investment myths debunked!
Published on Mon, Nov 10, 2008 at 10:50 in Markets section
Tags: Wealth Special, Investment
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Most of us perceive only equity as risky.
In fact, this risk perception is so high that more than 90 per cent of Indian households do not invest in equity at all.
As a result, we invest in the so-called safe investment options and believe in the following myths:
Myth 1: My locker is the safest
Fine, let's go by that for a while! Now, assume you need Rs 12,000 per month to meet your household expenses. And let's say the inflation rate is 8 per cent per annum.
After a year, thanks to rising inflation, things would keep getting expensive and the amount of Rs 12,000 will suffice you only for 28 days (in a month) after 1 year and 26 days after 2 years. And within 9 years, you will barely survive for 15 days on Rs 12,000, which you kept in your locker.
So, the moment you have money, inflation will erode its value day-by-day, year-by-year, decade-by-decade.
Myth 2: FDs help create good wealth
Let's say you choose to invest money in fixed deposits (in India, the investment in Bank FDs is nearly ten times the money in MFs). Today, inflation is around 10 to 12 per cent, and the interest rates are also around 10 to 12 per cent, so it seems like you could keep pace with inflation. This is only partially right.
This is because interest received on FDs is taxable. So, except for those who fall in the 'Nil' tax bracket, most of us would have to pay tax ranging from 10 per cent to 30 per cent. Clearly, the post-tax returns will be lower than inflation.
This means, even with FDs, the low post-tax, post-inflation returns will ensure that the survival becomes difficult year after year.
And, wealth creation is practically ruled out.
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