We have always been taught that debt products like FDs, insurance plans, PPF accounts, NSCs, bonds, recurring deposits etc., are very safe and there is no risk in these products. When we think about “safety”, we only think about assured returns and security of capital. But tell me let you that your thought of “safety” is flawed and it does not assure preservation of purchasing power, even though your money has grown steadily, it has not grown in real terms. In fact, your purchasing power has been coming down. That’s problem with debt and that’s really something which should concern us. It implies we forget to look at the maturity value in terms of its purchasing power and it can pose a problem in your financial life.

The biggest problem with safety product is that it does not have the strength to fight inflation. Inflation, over the long run, has been eroding the purchasing power of your money and debt products have been giving returns which barely could compensate you for inflation. If you factor in taxes as well, you will be left with just peanuts in real terms.

busting

Typical Scenario

Just take a look at the previous generation, in which people purchased endowment plans with a sum assured of Rs 2 lakh or Rs 5 lakh or even Rs 10 lakh. Their policies are maturing now and they safely get their money back; no risk. Ask them, will it help to cope up with the escalated cost of living today? It can only help them survive in this world now; they will certainly not be able to enjoy the lifestyle they always desired because for that, they would require a lot of more money!

This is one of the major reasons for limiting in your debt products. Don’t overdo them even though it’s a secure, government backed investment products, and you might be losing out on a lot of opportunities to reap great returns from equity.

Let me give you some example:

Suppose you have 15 years in hand before your retire and shortfall retirement corpus Rs45 lakh after adjusting your EPF and gratuity fund. Being a risk averse investor, you choose PPF account for the same by investing of Rs1 lakh per year and you would able to accumulate only Rs30 lakh at the end of 15 years with a shortfall of Rs15 lakh which could not meet your retirement goal. A safe investment is of no practical use if it does not have the power to help you reach your financial goals. Don’t get me wrong, I am not saying that PPF is a bad investment product. By all means have a PPF account and invest in it, but keep your investment within a limit. If you allocate your Rs1 lakh in equity and PPF in the ratio of 70:30, you could able to achieve easily the target of Rs 45 lakh.

Investing in Equity

So, in the world of investing, when equity comes in various forms like stocks, equity mutual funds, ULIPs, ETFs or index funds, you will always hear statements like, “Stock markets are evil”, “Never invest in the stocks”, “You can lose your money”, “Stocks are nothing but gambling”, etc etc. and it will be followed by dozens of examples of people who lost money by investing in shares. Ultimately, it would get back to the myth- “Equity is risky”. But the only problem here is that they have limited knowledge and a limited number of examples. They have looked at one part of story and not at the complete story. Most of these people are short-sighted and concentrate on short-term investment.

Investors who do not invest in equity for the long term may have the opinion too- “Equity is risky”. In this article my aim, now is to break one of the biggest myths in our country which is “Equity products are very risky”. As a financial planner, I take upon myself the task of ridding you of two misconceptions:

It is well true that in the short term, equity can be very volatile and it is difficult to gauge which way market will move but over the long term, it becomes more stable as well as safe. You can expect good returns from equity in the long run. There may naturally be some of cases in which returns have not been great even with long term periods, but that’s very rare. It does not happen in general. That’s the risk of investing in equity which you take in order to get higher returns.

Differentiate Duration of Investments

So, if you believed that equity is risky and that’s why it’s not for you, you would be right, if you wanted to invest only in the short term. If, on the other hand, you have a long term view for your investments, equity is something you should definitely invest in, especially if you are young and have plenty of time in your hand. On the flip side, for any short term financial goals, you should use debt products like fixed deposit, debt funds, etc., which do not have any risk element. However, for any long term goals, you should invest in equity, as far as possible. In the short term, the focus is mostly on achieving the goal and preservation of your money to reach the goal, rather than growth of your money. A great return with assurity  can come only by luck; if you want a great return with low risk, then you will require “TIME” on your side.

The clear message to be gleaned from these is that “Equity is risky in the short run and quite safe in the long run and Debt is safe in the short run, but extremely risky in the long run”.

Ps: This article got published in Hindi Danink Bhaskar on 21-02-2017

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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