Should the upper middle class Indian bother investing?

This article of mine was originally published on , India’s premier Business and Startup site on 19th November, 2012, over here.

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Image Credit –

I am sure that you have heard all sorts of stories about investing. You have probably heard of the likes of Warren Buffet & Rakesh Jhunjhunwala whose financial acumen transformed two middle class investors into demi gods with large fan followings.

I am also fairly sure that you have heard of your distant “uncle” or “cousin” who lost his life’s savings in the “dangerous” world of stock markets and “recklessly ruined” his family’s future. So, as an upper middle class desi should you even bother with the stock market in specific and with investing in general?

Why fiddle with something you don’t understand?

The arguments against investing are pretty straightforward – You are earning decent money, have a fairly safe job and not too much to worry about. So, why would you fiddle with something you don’t understand well? Right?

You knew this, didn’t you?

Prima facie, this sounds like a fair argument. Let’s dig a little deeper. The average inflation rate over the last 5 years in India was approximately 9.8% p.a. Therefore, your money has steadily been losing about 10% of its value every year.

Let me rub this in a little more, for dramatic effect – If you had taken a 100 rupee note and put it under your bed in 2008, it would have bought you roughly the same stuff (groceries, clothes etc.) now as Rs 62.5 would have bought you in 2008.

Money in India has essentially lost about 37.5% of its value over the last 5 years.

Long story short- Price rise makes you poorer every year. Unless you have been living under a rock, you already knew this. But did you understand the magnitude of the problem? At least now you do (hopefully)!

“I want to make my money work for me”

I often hear people use these exact words. They want to save for their children’s education, for buying a home or for vacations abroad. How would they be able to accomplish all this if they are not even able to retain the value of their money?

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Image Credit-

But I earn interest!

Most banks pay about 4% p.a. in interest these days. Taking that into account, Rs 100, deposited in a bank in 2008 would be worth about Rs 121 today and would be able to buy roughly the same stuff (groceries, clothes etc.) that Rs 76 could buy in 2008. You’ve still lost about 24% of the value of your money over the last 5 years.

Most logical people would, at this point, acknowledge the need to do something about this problem. I bet you do too. So, what we need is some form of return that is in excess of the average rate of inflation i.e. ~10% p.a. so that our money retains its value and perhaps if we are lucky, even grows in real terms. I am hinting at investing, right?

What of fixed deposits?

One might argue that fixed deposits pay higher rates than savings accounts. The point is – if you are talking about putting your money away in a fixed deposit – you are essentially investing. Well done! That is a good start.

But, let’s look more carefully. Assume that your friendly neighborhood bank, after making you stand in line for a few hours, pays you 8.5% p.a. That’s almost good enough to beat inflation, you would argue. Not really.

If you are a tech savvy Indian reading this article, you most likely earn over 10 lakh rupees p.a. and are taxed at the rate of 30.9%.

So, what is your effective after-tax return? It is ~5.9% p.a.

So, over the last 5 years, your money would have lost ~17% of its value even though it was deposited in a fixed deposit. If you earn between 5 and 10 lakhs p.a, your after tax return is ~6.75% p.a. Over the last 5 years, your money would have lost ~13% of its value.

So clearly, this is not the solution that we are looking for.

The experts

I am sure you have heard “experts” on TV or newspapers extolling the benefits of investing and how investing is the undisputed panacea to all problems facing the world – how smart investments turn people into millionaires overnight, of how you should buy XYZ stock and avoid ABC stock.

Your financial advisor has probably also tried to sell you his bank’s miracle scheme with “guaranteed NAVs” that “protects the value of your investment” like a mother protects her child. Before I proceed to spew venom on these parties, let’s first take a look at how the markets performed over the last few years.

So, how have the markets performed over the years?

Had you invested Rs 100 on 1st January, 2000 in the Sensex(trading at ~5200 points), you would have about Rs 357 today-a return of about 10.4% p.a. Nothing to get excited about, you would say; and rightly so. What if you had invested Rs 100 in the Sensex on 1st Jan 2005? You would have about Rs 281 – a return of ~14% p.a. Much better, right? Here is where the party ends. The exact same investment on 1st January, 2008 would have left you weeping. You would have about Rs 92 today – a return of ~ -1.8% p.a. You would have lost money! “Experts” will be quick to point out that had you invested the same Rs 100 in February 2009, you would have Rs 199 today, a whopping 19.9% p.a.

So clearly, not everyone makes money in the markets. You earn sometimes and you lose sometimes. Right? What do our “experts” have to say about this?



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“In the long run, we are all dead” – Keynes

I am sure you have these very “experts” extolling the benefits of investing over the long run and how one should be patient in the face of ups and downs. Well, guess what? Most people I know are tired of free advise like this. They ask a simple question – “If 5 years is not the long run, then what is?” That is a very fair point. Most people are not interested in holding their investments over decades; and rightly so!

What is the solution?

So, if returns are volatile and unpredictable, if you are never 100% sure about getting your initial investment back, why should you invest? Suppose you were to stay away from investing, you wouldn’t have this problem.

But wait, you still have a problem. Your money is still losing value over time and you need that house of your own, that foreign vacation and that education fund for your children. What then, is the solution? Do you just have to work harder, spend longer hours in the office and slave away for the rest of your life?

You can’t have the cake and eat it too

Actually, you can. Smart investing is one possible solution. “But, would I have to continuously follow the markets, study finance or invest in mutual funds managed by experts?”, you could ask. The answer is – none of the above.

I will offer a solution to this problem in my next article in this series.

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