A lot of my clients, in the start of my fiduciary relationship with them as their Wealth Consultant ask me; “How much return are you going to give to me? “ OR in a more realistic tone; “Kitna return doge?”
I do not blame them for asking me this question as it is my clients’ hard earned money and so the investment risk is also theirs to be enjoyed. However, I do ask them one question in response to their question, which is; “Can you predict how much Sensex or Nifty 50 indices go up or down 1 week from today?” The answer to this from the clients is an obvious NO because it is not possible to speculate such results for any individual.
However, as the relationship matures this question fades away and the question that comes up is “Where to allocate and how to manage my assets so that I can achieve my goals?” Now, this is the mature question that my experienced clients ask me and as a Chartered Wealth Manager, I am delighted and obligated to answer them.
So to answer the question, how much return is ideal; we need to 1st answer the following questions:
- What is are my goals and requirements?
- How much money in today’s terms do I need to achieve it?
- How much time do I have?
- What is my risk appetite?
- What is my risk capacity to achieve this goal?
Once these questions are answered, we need to think about the level of inflation in the economy. In India, the inflation runs at approximately 7% p.a. which is much higher than the global average of approximately 3%.
This means that an item that costs me INR 100 today will cost me INR 107 one year from today (7% hike). Thus, with a 7% growth in India means that you are only preserving the purchasing power of your money.
Now, let’s assume you have parked INR 1,00,00,000 in a bank fixed deposit @6% p.a. interest with inflation @7% p.a. Note, that fixed deposits come with a tax deduction as source (TDS) of your progressive income tax. So post taxes the 6% return gets diluted to 4.2% return. But 4.2% return v/s 7% inflation means, the reality is that you have lost 2.8% purchasing power of your wealth in 1 year.
So on face value you have INR 1,04,20,000 in your bank account post tax, but real purchasing power of you money has slipped down to INR 97,20,000. So in reality you have lost INR 2.8 lakhs in one year.
This proves that being invested in the wrong asset can deteriorate the value of your hard earned money.
In case you are wondering if investing in property would have been an apt solution, we will answer this question in our future blog!
In order to conclude on the question of how much return is ideal, a minimum threshold must be BEATING THE INFLATION RATE and the final value of the goal must also be adjusted with inflation to avoid shortfalls in future.
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