Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Must Read: I’m saying this for first time

Posted by Muthu on April 6, 2012

I always keep sharing with you on regular basis. I’ve never said so far anything as must read. Normally it depends on your interest, time and patience to read what I write and share. 

But I request you to go through the below 3 files along with the pointers and explanations detailed below. I sincerely feel that this is a must read. 

I trust that it would genuinely be useful to you. 

30+ years comparative chart on Fixed Deposit and Sensex, adjusted for Inflation

30+ years comparative chart on Gold and Sensex, adjusted for Inflation

30+ years comparative chart on Silver and Sensex, adjusted for Inflation

Pointer and Explanations:

We always discuss about various asset class, the need for equity to be part of portfolio not only for capital appreciation but even for capital preservation.

I’ve been looking for data in public domain which captures last 33 years (since 1979-80 when Sensex base was kept at 100) of returns from Fixed deposits, Gold, Silver and Sensex, duly adjusted for inflation.

I was unable to get the same.

Few days ago, I saw in a newspaper how FDs have scored over Sensex in the last 20 years. I was surprised with the comparison and I felt it was out of context. Firstly Sensex was at around 45 multiples twenty years ago due to Harshad Mehta pumping lot of money illegitimately from banking system. Currently the market is on sideways or consolidation phase for the last few years with around 15+ multiples.

Not only that when you calculate Sensex returns we’ve to take into account dividend yield. The data given in the newspaper has captured only capital appreciation but completely ignored dividend yield which is must for a proper comparison.

Also post tax return from any investment also needs to be looked into. The huge tax benefits in equity over FDs have been completely ignored.

It would have been better if the newspaper has also pointed out how a retail investor investing regularly would have benefited over the above 20 year period.

Likewise whenever people talk about returns of gold and silver; I see there is lot of misunderstanding and misconception on long term return part.

When I happened to chat with Kashyap Vyas, an excellent professional and a good friend of mine from a fund house; we hit upon on idea to collate ourselves what we could not find in public domain and then share the same in public domain.

I worked on the idea using him as a sounding board for certain clarification and inputs.

The notes in the above files have all the details about source of data, assumption etc.

If you’ve kept as cash Rs.1 Lakh in a suitcase 33 years ago, its value is only Rs.7 thousand today. What it actually means? This means your cost of living has increased by 14 times (Rs.1,00,000/- divided by Rs.7000/-). To explain it little more, assuming the inflation rates are similar for next 33 years, the Rs.1 lakh you’ve today would be able to buy after 33 years goods worth only Rs.7000/- as on today’s value.

You can see for yourself what inflation has done to each asset year on year, for more than 3 decades. When we say, the investments have to beat inflation; some people have difficulty in connecting to what we say.

I’ll tell you a real life example. A family known to me is living on a corpus of Rs.10 lakh for more than 10 years, keeping the money in fixed deposit. Ten years ago, they were getting Rs.6700/- as monthly income (@8% interest per annum), which was sufficient to take care of their expenses. Now they are getting around Rs.7500/- as monthly income (@ 9% per annum). Their standard of living has extremely deteriorated because what 7k would purchase 10 years ago is lot more than what it can do today.

To put it in the words of Buffett:

“It makes no difference to a widow with her savings in a 5% passbook account whether she pays 100% income tax on her interest income during a period of zero inflation or pay no income taxes during years of 5% inflation. Either way she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous, a 100% income tax but doesn’t seem to notice that 5% inflation is economic equivalent.”

Sensex have given an annualized return of 16.92% in the last 33 years. Since every year dividend yield of Sensex is not available in public domain, I’ve not included the same in the year on year calculation. However assuming a dividend yield of 2% per annum, the annualized returns work out to 18.92%. So Rs.1 lakh invested in Sensex 33 years ago is now around Rs.1.74 crores. Adding the above dividend yield, the return would be Rs.3.04 crores.

The annualized rate of return for fixed deposits is 8.37%. So Rs.1 lakh invested in FD 33 years ago is worth Rs.14.22 lakhs today.

The annualized rate of return for gold is 11.22%. So Rs.1 lakh invested in gold 33 years ago is worth Rs.33.52 lakhs today.

The annualized rate of return for silver is 11.60% (more than gold!). So Rs.1 lakh invested in silver 33 years ago is worth Rs.37.44 lakhs today.

Still the above comparison has a catch. How to compare today’s Rs.1.74 crores or Rs.14.22 lakhs with that Rs.1 lakh 33 years ago. Money in two different periods is not comparable unless accounted for inflation. You can very easily relate to this. Many retired civil servants tell that they started as a clerk with a paltry salary of say Rs.100/- in 1955. You may feel that it is very less. But at an annual inflation of 10%, their salary would be worth Rs.23,000/- in today’s prices. Not bad, right?! It depends upon how well we’re able to understand the data

So the returns mentioned above for each asset class is nominal rate of returns. To compare what is 33 years ago with what is today, we’ve to adjust for inflation and arrive at real rate of return (detailed working is available in the files).

So Sensex at 16.92% annualized returns, after accounting for inflation is now worth Rs.12.54 lakhs. After including the dividend yield mentioned above, at 18.92% annualized returns is Rs.21.95 lakhs. Since I feel including the dividend yield is most appropriate, the capital has actually multiplied 22 times. For some reasons, you do not wan to account for dividend yield still the capital has multiplied 13 times. Let me repeat, this is real returns and not nominal one; as we’ve seen above, if we do not adjust for inflation, in nominal terms the capital has multiplied by 174 and 304 times respectively (without and with dividend yield).

Let us now look at other asset classes:

If we apply inflation adjusted growth, FD has grown to only Rs.1.02 lakhs today. Almost zero capital appreciation over last 33 years. As FDs are taxed based on accruals and not on receipts, even this return does not reflect reality. Since only after paying tax or deduction at source, compounding happens in FD, your capital (purchasing power) would have eroded significantly.

If we apply inflation adjusted growth, Gold has grown to Rs.2.42 lakhs today. Capital appreciation of 2.4 times over last 33 years.

For Silver, if we apply inflation adjusted growth, it has grown to Rs.2.7 lakhs today. Capital appreciation of 2.7 times over last 33 years.

Gold and Silver had a severe price fall over two decades beginning 1980 in international markets. We did not feel the impact because rupee depreciated a lot during the same period.

Despite all these if you see in the above files, in terms of inflation adjusted value, gold and silver (even FD too) was able to decisively cross the original capital only after 25 years; fuelled by extreme increase in gold and silver prices for the last 8 years.

Even to my surprise, I observed that Sensex at no given time at has gone below the original investment value after adjusting for inflation.

One Dollar was worth Rs.8/- in 1981. Whereas the conversion rate was Rs.48/- in 2002.

Gold prices fell from $892 per ounce in 1980 to $272 in the year 2000. A fall of around 70% in value over 20 year period.

When gold has depreciated by 70%, the rupee has depreciated by 600% in the same period.

So the gain we saw in the Indian market while prices fell globally was due to the depreciation in the value of rupee and strong appreciation in the value of dollar.

This further strengthened our illusion that gold prices never fall.

As I’ve said before commodities have longer cycle. It is mentioned that on an average bull markets in commodities last more than a decade and bear market nearly 2 decades. So despite gold and silver at somewhere in the peak of cycle, despite due to strong currency depreciation in the past decades, gold and silver has been able to deliver only above returns. I’ve taken only Indian prices of gold and silver for the last 33 years.

What if the prices of gold fall again globally say by 30% and rupee conversion rate remains the same? We would also experience a fall in prices.

Again what if the gold prices fall globally and rupee strengthens, say Rs.40/- to a dollar. It would be a double whammy. The fall would be more.

Commodities like gold and silver generally have longer cycles whereas stock markets usually have shorter cycles.

This creates an illusion the stock markets are instable and gold is stable.

In stock markets the recovery also may be faster but in gold the recovery may be longer.

Globally it took 28 years to get the same price for gold (i.e.) the highest price reached in 1980 was again touched only in 2008. Zero return for 28 years! Adjusting for inflation, a severe loss of capital.

I’m not against FDs or debt based products. You do know that I recommend them and suggest following the prescribed asset allocation.

But with out equity, you’ll not only be able to enhance wealth but even preserving wealth in terms of purchasing power is next to impossibility. The only exception may be people who have huge, really very huge corpus.

As I repeat, do not time the market. Enough studies and research has been done in this regard and the general pointer is, if you miss the best 1% of days (roughly 20 days) in 10 years, your return may probably equal a savings bank account return and if you miss 2% of days, you may not get any return at all or may even loose some capital. Instead of timing make investing a regular habit.

You may time only in the following situations- making lump sum investments when valuations are attractive, not making lump sum investments when valuations are expensive, start planning to phase out withdrawal a year or two before you near your goal – retirement, child’s higher education, daughter’s marriage etc. Again the term attractive or expensive valuation is relative. In a bear market, when you invest at attractive valuations, the markets can go further lower too and become more attractive 🙂 That’s fine as our investment outlook is long term and notional loss should not bother us.

Likewise it is very difficult to know what is an expensive valuation in bull markets. Bull markets are very euphoric and we may think valuations are high, still it may run higher for even few years. Only in hindsight we’ll know when the valuations get peaked out; that’s also fine. It is better to be safer than sorry. In bull markets, especially at later stages, it is better to continue only monthly regular investments and not make any lump sum investments.

Whatever I mention as equity is only applicable to portfolio of stocks like mutual funds or index. Individual stock picking is completely a different game and what I say should not be applied for individual stocks.

The only asset class missing from comparison is real estate. I wish there is a reliable, long term and broadly accepted indices for the same. In the absence of it, comparison is not possible.

You may tell me about a particular piece of property multiplied by hundreds of times in last 30 years. I can even tell stocks multiplied by thousands of times!

Likewise some property might not have appreciated much, illiquid, got into litigation, occupied by goondas etc. Like wise there are stocks which have vanished in thin air over the years. So we can only do comparison as a basket.

Though the real estate sector lacks any reliable and broadly accepted indices like financial assets, some studies peg the annualized return of real estate as an asset class around 12%. I’ve no idea what the real number is.

I request you to go through the files simultaneously with the above piece and share your feedback.

As friends from industry and professional community also read our blog, request you to go through and share your feedback.

Making of these reports in only a beginning. I thought it is better to have atleast an approximate data base or idea than not having one. We may fine tune it in the future based on your collective feedback.

Happy Easter and a long weekend.

35 Responses to “Must Read: I’m saying this for first time”

  1. Amazing article!

    Taxation impact is Vital.

    Master piece,

    If we apply inflation adjusted growth, FD has grown to only Rs.1.02 lakhs today. Almost zero capital appreciation over last 33 years. As FDs are taxed based on accruals and not on receipts, even this return does not reflect reality. Since only after paying tax or deduction at source, compounding happens in FD, your capital (purchasing power) would have eroded significantly.

  2. deepa said

    very informative. article

  3. Arun said

    Very good and informative article. We must appreciate the long hours and hard work put in for such a comprehensive study. Hope investors realise that over the long term, the only risk is in “not” investing in equities.

  4. Akhilesh Gururani said

    Very nicely written and explained. Keep up the good work, Muthu.

  5. Vivek K said

    Hi Muthu,

    You mentioned that India didn’t feel the impact of international gold price debacle because rupee also depriciated but in future if any such debacle happens and rupee value remains the same or appreciates, India will also feel the impact.

    My question to you is on the demand of gold in India. Do you think the country obsessed with gold will ever see declilne in the demand of gold and would this demand dictate the price of gold irrespective of what happens in the international market?

  6. rajapanda said

    Hi Muthu,

    Nice post!

    On the point of dividend being added back to the return of Sensex to make it 18.92% in the past 33 years.

    Even though the 2% of dividend yield is average, i think it has fluctuated between 0.5% to 3.5% odd in these years.

    And, the combined facts of

    1. Dividend yield is a payout in the hands of investor.
    2. The yield %tage is probably the highest when market is down and lowest when market is high.
    3. And the same is reinvested back into the index at those levels.

    Will probably have even more positive impact than the average of 2% which we have taken for the calculation.

    Just a gut feel. I might be wrong though!

    • Muthu said

      Valid point. We’ve dividend yield data only from 1991. It is amusing that people forget to take dividend yields. When looking at world markets; dividend yield has added to significant returns over the decades.

  7. One more idea for you to crunch the data you have: “Cycle” through each year since the beginning for return for a 5 or 10 year window. i.e. If you invest 1 lakh starting year 0, 1, 2 etc. And chart the return at the end of each 5 or 10 year period. This basically removes the “market timing” effects.

    Good data nevertheless.

  8. Shinu said

    Dear Muthu

    Great compilation.

    One thing i felt was if the FD had been locked for the higher rate at its best years, it must beat even Gold return….. Isint it similar to what it is to the current scenario of 2012?

    One point i dont agree in the post is missing the best dates- Time in market and the best days do coinside with the worst days too. so it is meaningless to say if you had missed the missed the best 10 days…etc. Hope you agree. May be if you write down he best 10days & the worst 10 days you may have a better picture.

    One good point is the SIP adjustment based on valuation. Frankly i am enjoying every fall with an additional kick and moreover i do love the lagging curve of the midcap index with that of sensex and smallcap with that of midcap.

    Thanks

  9. […] While WiseWealthAdvisors:Must Read: I’m saying this for first time (Apr 2012) which has 30+ years (since 1979-1980) comparative chart on Fixed Deposit and Sensex, Gold and Sensex, Silver and Sensex adjusted for Inflation said […]

  10. Prasanna said

    Hi Muthu, Awesome Analysis and thanks for sharing the data. It is always very nice to look at the numbers rather than making general statements.

    – Given that the other major investment avenue for Indians is Real Estate, it would be very cool if we can measure the returns there. Of course it is hugely dependent on the location, kind of property, black versus white money etc. But it is such an important avenue that it cannot be neglected

    – Also the concept of rolling returns (maybe averages for 10 year rolling returns?) may further enhance the value of this analysis. Like you pointed out ET took a static 20 year picture. The same bias may creep when we do one off returns as well.

    Overall, the analysis is very solid and thanks for sharing.

    regards
    Prasanna

  11. neelkant said

    lovely lovely lovely.. really enjoyed reading this.
    I’m a doctor who just started understanding financial jargon.

  12. Albin Thomas,Bangalore said

    Incredible Article.Congratulations for ur hard work!

  13. Wow!!
    Amazing analysis.
    Hats off.
    Yes, even experts were suggesting to buy Gold (in fact, ‘hoard’ Gold) for the past 2 years and now that Gold has been stagnant for the last 3 months, these ‘experts’ are now suggesting “Real Estate”
    I wonder why the experts are always against Equities especially when the Valuations are attractive??

  14. deepak vaid said

    HI MUTHU SIR, CURRENTLY I AM INVESTING 10000 PER MONTH THROUGH 5 SIP,AXIS EQUITY,HDFC TOP200,HDFC GOLD FUND,DSP BLACKROCK TOP 100. IF I COULD CONTINUE 5000 PER MONTH OF 25 TO 30 YEARS WHICH FUND I SHOULD GET TO ACHIEVE 1CRORE AFTER 25 TO 30 YEARS. NOW ABOVE MENTIONED SIP WHICH SHOULD BE WITHDRAWN.
    THANKS & REGARDS,
    DEEPAK VAID.

  15. Kapil Vyas said

    nicely written and explained
    Overall, the analysis is very solid and thanks for sharing
    Regards,

    Kapil Vyas

  16. ratnakumar72 said

    Hi MUTHU,,
    Excellent article..
    Iam very happy to see this article.

  17. ajay said

    Hi Mr. Muthu,

    Nice article.

    I have a question about NRI FD combined with MF SIP! I am a NRI from Gulf.

    I have a sufficient portion of money in equity funds and for the debt portion, I was investing in debt funds for the asset allocation and as well as for better post tax returns from debt funds.

    Now NRE FD’s provide a tax free return of 9% on a 10year deposit.

    Is it not a wise decision to lock in the debt portfolio in such long term deposits and take the quarterly interest and invest in a quality equity mutual fund and shun totally the debt funds which going by their past records never registered a 9% returns on a 10year period. This way the capital is protected (no need to get fooled by CAPITAL PROTECTION FUND of MF). A guranteed 9% deposit from a bank like SBI is too good for a debt folio (even MIPS provide that much return only in long term and still tax have to be paid).

    Lets say if I invest 50Lacs in 10Year FD @ 9%, the quaterly interest is approx. 111,000Rs. If the same amount is invest in pure equity funds (lets say quarterly or monthly as 37500), the returns from the equity fund should be atleast 12 – 14% in a 10year time frame and the capital of 50Lacs is safe as well. This return will be more than the cumulative FD return of approx 1.2Crore in 10Years.

    Is my judgement is correct or am I missing anything.

    In otherwords, how should one invest 50Lac safely without taking too much risk however maximising the return, given a scenario where the NRE FD is tax free?

    Regards

  18. M said

    Hello,

    Thanks for your article, its been very insightful.

    The research done on the Indian market is great, however what if India is to be the next Greece/ Japan/ Russia ? Whether you invested in stocks/ real estate or FD doesn’t matter, all investments besides gold would be affected if your country is in crisis. Since India is an emerging market, I think there is place for Gold in everyone’s portfolio (4-8%).

    Equity markets will outperform most other un-leveraged investments, however investing in only in your home country is a huge mistake. The more countries you add to your equity portfolio the more you are protected.

    I am currently planning to sell my home in Mumbai and invest in corporate debt, and then SIP the corpus to global equity (US, UK, India) over a 10 year period. I have no financial goals for the future I require this money for. I am hoping you could advice whether this would be a good plan.

    Thanks
    M

  19. […] Advisors  Must Read:I’m saying this was for first time have compared returns of gold,silver, fixed deposits and Sensex and suggest why investing in […]

  20. Ritesh Doshi said

    I strongly agree with you to do SIP for wealth Creation. But it can be done by those who have regular income and save a part of it for long term. In your example of widow, she has to meet regular household expenses for which she require a regular income and hence has to depend on FD, eventhogh inflation eroded the capital. Or she had to go for work. I think the only way to avoid such situations is to save while you are earning for long term wealth Creation. Very good article.

  21. Ritesh Doshi said

    What is your view on returns from lic policies sold as an investment products. Even these policies are held for 30 years.

  22. Vipin Sharma said

    I read your blog, and its competently change my mind after seeing the comparison of Sensex and FD.

    I have zero knowledge about market and i don’t know that how to invest in market and where to invest, surely i want to go for long term investment, can u guide me how to start and where to invest my money i.e mutual fund or direct share market.

    how can i get knowledge about Share market.

    • Muthu said

      For investing in stocks, please contact a SEBI registered investment advisor.

      We only advice on mutual funds; that too only for clients who invests through us.

  23. Mohin said

    very informative. article

  24. Pavan said

    Very effective data to get the clear picture of the different options to invest. Thanks a lot.

  25. […] Advisors  Must Read:I’m saying this was for first time have compared returns of gold,silver, fixed deposits and Sensex and suggest why investing in […]

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