Which is the best long-term investment to make?
Short answer: stock markets (either directly or through Mutual Funds). We just saved you some time and you can get back to scrolling your favourite social media site.
Long answer? Read on.
Look at the infographic. The graph in it shows two things.
First, it shows how much each investment will fetch you (in % terms) over long term on average annually. Yes, there is data available on average annual returns for various investment types. Investing in stock markets (either directly or through Mutual Funds) has given a rate of return of 14% annualized on average. Stock markets are definitely volatile (risky) in the short-term – one year they can be up 50% and another year down 30% – but they do get less volatile over longer time horizons (and give higher returns).
On the other hand, real estate, contrary to what many believe, gives just around 10% (otherwise the Ambanis and Tatas of India would have had all their money in real estate instead of businesses). The lowest is fixed deposits (FDs) which is just 8% pa (but without volatility).
Second (though more important), the graph shows what the investment returns are over and above the rate of inflation. Unfortunately, inflation is a reality we don’t consider when we look at returns on our investments. We look at returns in isolation and often they seem better than what they are really worth.
For instance, lets assume that you get 100% returns on the Rs 100 that you invested last year. So this year you have a whopping Rs 200. But what if everything that cost Rs 100 last year also costs Rs. 200 this year? Suppose the dal that cost Rs 100 per kg last year also increased to Rs 200. The investment has doubled but you can still just buy 1 kg dal with it. So the point is, to actually make ‘money’, your investment returns should earn substantially more than the rate of inflation.
If we look at the graph again we see that investing in stock markets gives you 7% over and above the inflation, whereas real estate gives you a little less than half, 3%. This is a substantial difference. This becomes worse in the case of FDs. You are barely keeping up with inflation. All the delayed gratification for this?
Many of us have often felt that we would much rather get ‘lower but safer’ returns from FDs as opposed to ‘higher but volatile’ returns from equity Mutual Funds. If we invest based on this, we are overlooking two important points. One, stock markets are less volatile over long term and in fact, give much higher returns than FDs or even real estate (and equity Mutual Funds make it very easy for individuals to invest in the stock markets). Two, the returns we get from FDs do not add wealth because they are nullified by inflation.
“I got rich by investing in FDs and buying Insurance policies” – said no one ever.