Wise Wealth Advisors

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

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36 years of performance: Sensex, Fixed Deposits, Gold and Silver

Posted by Muthu on April 1, 2015

April is the time for annual review. I would be sharing your portfolio summary along with my note. I aim to complete this task by end of this month. If any one of you does not receive the report from me by 30th of April, request you to inform me. I’ll take care to ensure that each one of you receive this.

Please note that for those of you who have become our clients after December 31’st 2014 would be receiving the report and review only in next April (2016). Three months or less is too short a period for review.

As always, other than the above, whenever you need a report or review during any time of the year, please feel free to get in touch with me.

For last 4 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) 36 years return- FD & Sensex

b) 36 years return- Gold & Sensex

c) 36 years return- Silver & Sensex

1) Assume you’ve invested Rs.1 lakh each in FD, gold, silver and Sensex 36 years ago. As of 31’st March 2015 the value is as follows: FD- Rs.18.33 lakhs, Gold- Rs.33.54 lakhs, Silver- Rs.24.91 lakhs and Sensex- Rs.2.80 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 return works out to Rs.5.13 crores.

3) To put it another way, during last 36 years:

Fixed Deposits has multiplied wealth by 18 times

Gold by 34 times

Silver by 25 times

Sensex by 280 times

4) In terms of percentage, the 36 years return (as given above) is as follows: FD-8.41%, Gold- 10.25%, Silver- 9.34% and Sensex- 16.93% (18.93% if dividend yield is as assumed above)

5) When we talk about returns, we’ve to talk about inflation too. The average annualized inflation for the above period is 7.73%.

6) If Rs.1 lakh has been kept under the mattress instead of being invested, it’s value has come down to mere Rs.5500 (i.e.) purchasing power of rupee reduced by whopping 94% over 36 year period.

7) 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 and excluded taxation. Inflation is common for all.

8) After adjusting for inflation, the asset classes have grown by following annualized rate in real terms: FD- 0.68%, Gold-2.52%, Silver-1.61% and Sensex- 9.2% ( 11.2% 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 9%.

9) Gold’s real rate of return of 2.52% is made possible due to rupee significantly depreciating between 1980s to early last decade. Otherwise we might have got even a negative return; as globally gold fell by around 70% during the above period. 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.

11) Real estate would normally give returns better than fixed deposits but lesser than equity. There is no reliable long term data available for real estate. From what I understand from reading, in the long run, real estate can be expected to give 2% to 3% more than inflation. If inflation is 6%, we may expect a long term price growth rate of around 9%. By providing 17% for nearly 4 decades, equity has scored well over real estate.

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

5 Responses to “36 years of performance: Sensex, Fixed Deposits, Gold and Silver”

  1. Ram said

    Mr. Muthu .. i happened to bump across your website and the article on Home page is well written, informed and thought provoking. having subscribed to another Financial planner myself, i totally agree with your article. Thanks for enlightening us.

    Ram

  2. Anand said

    an avg person sees an investment cycle of 36 years inly once in his lifetime. So i had a few questions:
    *not challenging you, just trying to understand better

    1. Can you pls look at a similar comparison in japanese stock market and pakistani/syrian stock market
    2. History rarely repeats itself with exact same details, so to say that ppl who retire 36 yrs from now will beat inflation?
    3. Look at 401(k) of american people who retired in any depression lets say in 2002. Did it beat inflation

    Anand

    ( i am a commodity/currency trader who hates real estate/gold as an “investment” )

  3. Siddhartha said

    Kudos!! Mr. Muthu,

    Like Ram, I also happened to bump across your website and read all the articles under ‘Recent Posts’. No doubts, they are so well explained with examples, without using jargon. I am taking your advises seriously and intend to invest in Mutual Funds (SIPs) for achieving long term goals. Keep up the good work.

    Siddhartha

  4. Sailesh said

    Dear Dr Muthu,

    I read your comment. It was very informatic but to make it more pragmatic can you draw the growth comparative with time hoeizon 26, 16, 10….6 years. It would be more understandable. I am sure your max patrons are most in investment time horizon of 25-5 years .

    Thanks / Sailesh

  5. DD said

    Sir, how about also get a column about salary increment percentage of Govt employee..in last 35-6 years as they get indexed salary…n how well the indexed is maintained….

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