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

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1980 to 2014: Sensex Vs. Fixed Deposits, Gold & Silver

Posted by Muthu on April 14, 2014

Wishing you a very happy Tamil New Year.

For last 3 years, I’ve made it a practice to give performance comparison of various asset classes- Sensex (Equity), Fixed Deposit (Debt), Gold and Silver and the impact of inflation on them beginning from the financial year 1979-80. Why 1979-80? That is the year from which Sensex came into existence with base as 100.

Please find attached 3 files

a) 35 years return- FD & Sensex
b) 35 years return- Gold & Sensex
c) 35 years return- Silver & Sensex

1) Assume you’ve invested Rs.1 lakh each in FD, gold, silver and Sensex 35 years ago. As of 31’st March 2014 the value is as follows: FD- Rs.16.94 lakhs, Gold- Rs.36.51 lakhs, Silver- Rs.28.39 lakhs and Sensex- Rs.2.23 crores

2) Unlike other assets mentioned above, Sensex has dividend yield in addition to capital growth. Assuming a dividend yield (duly reinvested) of 2% on an average, the Sensex returns work out to Rs.4.05 crores

3) In terms of percentage, the 35 years return (as given above) is as follows: FD-8.41%, Gold- 10.82%, Silver- 10.03% and Sensex- 16.72% (18.72% if dividend yield is as assumed above)

4) When we talk about returns, we’ve to talk about inflation too. The average annualized inflation for the above period is 7.57%.

5) If Rs.1 lakh has been kept under the mattress instead of being invested, it’s value has come down to mere Rupees six thousand (i.e.) purchasing power of rupee reduced by whopping 94% over 35 year period.

6) What we should look for is real returns (i.e.) returns after inflation and taxes. Since tax differs from each asset class and income category, I’ve taken only inflation. Inflation is common for all:-)

7) After adjusting for inflation, the asset classes have grown by following annualized rate in real terms. FD- 0.84%, Gold-3.25%, Silver-2.46% and Sensex- 9.15% (around 11% including dividend yield). These numbers matter a lot. This is what our wealth would have grown after adjusting for inflation. Since we know the tax details for each asset class and for our income, we can work out the return after taxes too. FD would automatically turn negative. Gold and Silver would have provided a negligible return. Only equity would have provided a real rate of return of above 7%.

8) In the long run, the best we can aim and get even in asset classes like equity and real estate is real return of around 4%+. Growing money is that difficult. More important is not losing the money.

9) Gold’s real rate of return of 3.25% is made possible due to rupee significantly depreciating between 1980s to early last decade. Otherwise we might have got even a negative return. I’ll explain this by example. Assume the rupee dollar conversion rate is 1 USD = Rs.60. For illustration purposes, let us assume the price of 1 gram of gold is 1 USD. With the above conversion rate, the value of 1 gm of gold is Rs.60. Imagine a scenario when rupee depreciates by 100% (i.e.) 1 USD = Rs.120/- The gold price remains the same at 1 USD. The value of our gold would increase by 100% to Rs.120/- though the price has not changed in the international markets and we being the net importer of gold.

10) Please use FD for contingency or emergency funds. Let gold be part of social requirement and not exceed 5% to 10% of investment portfolio. Silver is again part of only social or cultural needs. Equity is for building wealth. I believe real estate also can build wealth but has no reliable long term past data.

11) Please go through the workings and assumptions in the attached file. I’ve tried my best. It may not be perfect but would be a useful pointer. Request your opinion and feedback.

18 Responses to “1980 to 2014: Sensex Vs. Fixed Deposits, Gold & Silver”

  1. Nishanth said

    Agreed . Real estate and equity are the proven ways in Indian context to get CPI inflation beating returns.

  2. Kamal Ghelani said

    I fully agree.

  3. Kamal Ghelani said

    Perfectly agreeing.Intelligent investments pays in long run.

  4. Jay Purohit said

    Data given is prefect. Your datasheet requires small correction in second page it should be “As on March 31st 2014”.

  5. Amazing data gathering and crunching.
    Hats off Muthu.
    You have been spot on as usual.
    Thankfully, people are slowly coming out of the Gold attachment.
    But, somehow, they still seem to “fevicoled” to Real Estate.

  6. ltinvestment said

    Please compare Sensex with Real estate in commerical area of mumbai / delhi.

  7. gopal said

    Ok

  8. Thanks for your analysis. It is very informative!

    For real-estate price trrends, NHB Residex data is available at http://www.nhb.org.in/Residex/residex.php

    Although this data is limited, it is evolving nicely for our analytics.

  9. Vignesh said

    Very good analysis. Thanks Muthu

  10. RVM said

    Excellent analysis. Among all classes of common investments, real estate, stock, bonds Gold ( to be more precise precious metals) are the worst. You will find this to be true when you compare , S&P500 or any other common stock market index. In addition investment in Gold does not generate wealth either , unlike investments in stock or bond.

    Given that you may wonder why invest in gold at all. It is because Gold is liquid and easy to transport and does not depend on external entities. Above all, investment in Gold is a vote of no confidence in the future of society or government. That is why Gold prices go up in times of war and uncertainty. The fact that Indians continue to invest in gold is such large quantities should tell you something.

  11. sridhar said

    I agree but it is very difficult when to exit and when to buy ..
    sridhar

  12. Prashant said

    But what if one Lakh invested in shares of Sensex 35 yrs ago, which are down today

  13. I saw your sheet FD and Sensex. Good calculations. However one error. You have calculated one yr FD & Sensex returns & then adjusted it for inflation factor. In doing this, you are factoring the entire inflation in one go. However inflation is not a one day phenomenon that you can factor entire year’s inflation in a single day.
    Inflation is a daily phenomenon, erodes real value of money on a daily basis and therefore has to be adjusted on a daily basis. The correct method would be to calculate the return % net of inflation.
    To explain if sensex return/ FD return is 10% and inflation is 15%, instead of first calculating pre inflation figure as 110000 and then adjusting for inflation and arriving at 93500, you should factor net rate of -5% (10%-15%), answer will be 95000.

  14. Yogesh Lakra said

    very good comparison, very handy information. what about comparison of FD and insurance as taking risk cover as an advantage and thinking of downward return of FD in coming years?

  15. Mittal said

    Hello,
    I got one question. When we say invest in ‘Sensex’, it means that we have to invest in Sensex index composite stocks.
    Now, more often index will include only winners and kick out losers or bankrupt (for example say Satyam).
    Now as per weightage if you invest in these stocks as earlier they were part of index, you have to bear losses also which could drastically affect your returns( Could go in negative also).
    Can someone provide numbers based on investment made at that time in Sensex indexed stocks?
    This will give accurate returns as no point in calculating only winners returns. I am only trying to be fair.
    FYI- one observation- for last 24 years (considerable huge time frame) – 1992 – 2016 – Sensex CAGR is less than 7% as compared to 16% now.

  16. […] The article has been written by D. Muthukrishnan (Muthu) and can be found on his blog here. […]

  17. Sanjay said

    Theoretically you are right. But practically the cause of equity allocation is the key to profit/loss rate. Can you please also take examples of stocks with best and worst case scenario. In that case your theory of equity is always better than other assets like Gold is not not true and may be contradictory

  18. Rashminder Singh said

    Good analysis

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