For the last 5 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.
1) Assume you’ve invested Rs.1 lakh each in FD, gold, silver and Sensex 37 years ago. As of 31’st March 2016 the value is as follows-
FD: Rs.19.75 lakhs,
Gold: Rs.36.53 lakhs,
Silver: Rs.24.46 lakhs and 💰Sensex: Rs.2.53 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.4.76 crores.
3) To put it another way, during last 37 years:
Fixed Deposits has multiplied wealth by 20 times
Gold by 37 times
Silver by 24 times
Sensex by 253 times
4) In terms of percentage 6 years return (as given above) is as follows-
Silver: 9.02% and Sensex: 16.13% (18.13% 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 7.67%.
6) If Rs.1 lakh has been kept under the mattress instead of being invested, it’s value has come down to mere Rs.5208 (i.e.) purchasing power of rupee reduced by whopping 95% over 37 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–
Silver: 1.35% and
Sensex: 8.46% ( 10.46% 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 around 9%.
9) Gold’s real rate of return of 2.54% 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.65. 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.65. Imagine a scenario when rupee depreciates by 100% (i.e.) 1 USD = Rs.130. The gold price remains the same at 1 USD. The value of our gold would increase by 100% to Rs.130 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 16% for nearly 4 decades, equity has scored well over real estate.
12) Please go through the workings and assumptions . I’ve tried my best. It may not be perfect but would be a useful pointer.
– Sajal Goyal, Economist