When you decide to invest your hard-earned money, it's tempting to look for investments that speak of "huge returns" in a short period. Though you do have a probability of making a large return, you have a much larger probability of losing your money.
Hence, many investors shy away from taking risk and invest in safer options, especially, the investors who prefer to be safe than sorry. Safe investors usually find it difficult to digest the volatility that comes with market investments. They also hate to see their investment's value reduce within a couple of months of investment or get restless if it does not grow as per their expectations.
That’s why these investors are so attracted to low-risk investments like bank deposits, PPFs or government bonds. If you too fall under this safe category, here are some factors you should consider before making your investment decision.
Know the Amount You Need to Fulfill Your Goals
The sooner you understand how much you need to fulfil your goals, the better you can plan towards achieving them. For example, if your goal is to accumulate an adequate retirement corpus, know how much you will need over 20 years to lead a peaceful retirement life. For instance,will Rs 50 lakhs be enough or Rs 1 crore or even more?
Can Traditional Bank Deposit Help You Accumulate This Amount?
When it comes to investing, safe investors usually prefer options like a fixed depositor recurring deposit, considering them to be relatively risk-free. For them, the security of having their money in banks is apparently a significant factor. But have you introspected this- Is putting your funds in recurring deposit actually saving or losing money?
For instance, to accumulate a corpus of 1 crore in the next 20 years, you must invest approximately 30 lakhs today in a recurring deposit, having the interest rate of 6.5%. That’s a massive amount, quite difficult to invest as a lump sum.
Also, interest income from recurring deposits is taxable. So, is there an alternate option? Yes, there is- investing in equities.
Stock Markets Have Risen at A CAGR of 13.06% Over the Last 20 Years
In the year 1998, 20 years ago, the BSE index was at 3055. Today, the Sensex is at 35, 574 (July 2018). Meaning, it has risen at a CAGR of 13.06%over the last 2o years. CAGR or compound annual growth rate denotes the annual growth rate of an investment over a specific period.
This rate for stock market returns, which is more than 13%, is much higher than the return rate from traditional investments like bank deposits. Since long-term returns are tax-free, there is definitely no comparative asset class other than equity-related instruments that can give high returns over the long-term. Put simply, returns from equity-related investment have proved to be greater than traditional bank deposits.
How Can Equity-Related Investment Help Accumulate the Required Amount?
Instead of investing in a recurring deposit, think of investing in an equity-related investment like a good savings plan . Here’s why:
Let’s consider the return rate of 13% from savings plan for better comparison with traditional instruments like bank deposits. This rate is assumed based on the stock market CAGR over 20 years, mentioned in the third point.
At this rate, over the next 20 years, you just need a principal amount of Rs 8 lakhs to reach the 1 crore milestone, as opposed to 30 lakhs as seen in case of recurring deposit.
No doubt, the returns will vary, may see highs and lows, but considering the long-term horizon, they will average out to give you better returns than bank deposits.
Being a safe investor and investing only in bank deposits will not get you the desired time value for your funds invested in it. If you want to invest your money for a longer period, you should consider going fora savings plan. Moreover, prudence and awareness can ensure that your investment journey with a savings plan can be a fruitful and productive one.