Is your money really growing in Fixed Deposits?

Are you one of those people who keep most of their savings in their bank accounts? If yes, then I have some bad news for you. While you may think that the money you've invested in fixed deposits is very safe and its value is growing every year, in reality, you couldn't be further from the truth.

Yes, I agree that your money is increasing by 8%(after taxes & fees) every year. But does its value increasing? Let's see.

INR 1 crore, invested at 8% compounded interest rate, ten years ago, would have become INR 2.15 crores today. That looks like a huge gain; your money has more than doubled, right?

Now think about what you could have bought for INR 1 crore, ten years ago.

Think about real estate. In last decade, housing prices have gone up by 5x-10x(even 100x at some places), all over India. So a plot of land, which you could have afforded ten years ago, has become so expensive that the interest which you've earned won't even cover it by half!

Think about everyday household items that you use. Most of the branded items like shoes, hair oil, food, etc., have become 3x-4x expensive.

In fact, the real inflation rate, not CPI or WPI but what we experience, is about 10-12%. So you're losing money like anything while you think it's safe! Is that what you want?

How can you beat inflation?

Well, don't worry if until now you've "invested" in fixed deposits. Worrying won't change anything. But now that you know what the problem is, you can do something about it. 

Since most of you're employed, it would be difficult for you to start your own business. That leaves you with three options - real estate, the stock markets and commodities(chiefly gold). 

Real estate is a tricky investment. You've to know many things like location, expected development, price, etc. Plus when you part with your investment, you've to pay at least 20% ltcg tax and 3% cess. If can really give enough time to check all the facts, then you can invest in real estate.

Even gold has been proved to be a sound investment over the long term. In last ten years, it has gone up about 4x, which turns out to be about 14% CAGR, which is an excellent return. Though from last few years, it has come down a little bit. I don't know much about gold so I won't elaborate further but you can google it. You can also take a look at platinum, which cheaper than gold nowadays! But remember, like real estate, even investment in gold will be taxed at similar rates when you sell it.

The stock market can also be a very rewarding investment. You may have heard of people like Rakesh Jhunjhunwala and Warren Buffett, who have made billions from the equity markets. The most notable advantage of shares over real estate and gold is that, in India, LTCG(long term capital gains) in stocks are completely tax-free! Let me elaborate on stocks a bit.

Stock Market

BSE Sensex has 16.4% CAGR growth rate since inception.

Sensex since April 1979

Some businesses need external funds to grow - for starting new factories, for expanding distribution/marketing network, etc. When a business achieves sufficient size or when the owners of a company want to sell a part of their business, they come with an IPO(Initial Public Offering) to the stock markets. During an IPO, investors(like you and me) can buy the shares of the company. 

A Share or Stock represents a (small) part of a company. For example, if a company has ten lacs total outstanding shares and you own 10000 shares of the company, then you're 1% owner of the company.

After the completion of IPO, the shares of companies are traded on Bombay Stock Exchange(BSE) or National Stock Exchange(NSE) or both. So you can buy shares of any listed company through these stock exchanges. 

Why invest in stocks

If you think that a business can grow a lot in coming years or if you believe that the shares of a company are trading below their expected fair value, then you can buy its shares. 

For example, three years ago, when microfinance industry was going through a crisis, I felt that SKS Microfinance LTD was trading below its fair value. So, I accumulated its shares at an average price of INR 150.

Stock Price of SKS Microfin

On Friday, its closing price was 546. So, it almost has been a 4 bagger(yes that's what we call it) for me in 3 years. And that's been possible because its profits have grown at a healthy rate.

Similarly, there are other businesses that have grown a lot over many years. Take Eicher Motors Ltd, the maker of 'Royal Enfield' bikes, as an example.

Stock Price of Eicher Motors

It has shown an astounding growth of 17-18x over the last five years. And what is the reason for such an increase in its share price? Simple because its profits have grown at a very fast pace and because it was undervalued.

But not all companies give such kind of returns. Take SBI, which is a poorly managed bank, as an example.

Stock Price of SBI

As you can see, SBI has destroyed shareholders' wealth over the last five years. It is because the business isn't performing very well. Did you know there is four lacs crore worth of bad loans (like Mallya) in our banking system and most of them are in public sector banks; meanwhile, private sector banks like HDFC Bank, Yes Bank and Kotak Mahindra Bank are growing at a decent pace!

So the moral of the story is that you can earn a lot of money from the stock market provided you select right stocks at low prices and keep on holding to those stocks for the long haul. And amazingly you don't even have to pay taxes on your long-term gains! You can beat the shit out of inflation. So think again the next time when you're going to "invest" your savings in fixed deposits!

*If you want more articles on stocks, you can request in comments.