Are you losing money?

The habit of saving money has deep roots in Indian culture. We touched upon this in an earlier blog, ‘The Mool Mantra’ where we described how a majority of our wealth resides in banking deposits, whether in savings bank (SB) accounts or fixed deposits (FD). This should imply that the overall wealth of Indians has been steadily growing.

But looking at the interest earned through such savings is understanding only one side of the equation. The key to the other part is in an evocation we’ve all heard from our elders, “hamare zamane mein x used to cost just y rupees”. It is why many of us tell our parents those shoes cost less than they actually did. We’re speaking, of course, of the omnipresent ghost of inflation.

At the time of writing, the interest rate on fixed deposits stands at about 5% for a 1-year period while inflation is above 6%. Abrakadabra, your money has actually shrunk by 1%! The gap between actual and perceived returns widens to negative 3% if the comparison is being made with savings bank interest rates. If you add the impact of taxes on your returns, you quickly realise that this is a terrible magic show indeed.

Basically, the traditional banking deposits aren’t really savings at all. In the long haul, this can result in wealth erosion.

What are your other options? Call the ghostbusters? Let’s keep the exorcisms away for now.

The investment opportunities available to you can broadly be bucketed under 3 categories (a.k.a. asset classes) — equities, debt (both short and long term), and gold.

Table 1: Returns across Asset Classes

The table indicates that returns from equities beat inflation by the biggest margin. Returns from gold and debt beat inflation as well, albeit by a smaller margin. By investing your money in a combination of these asset classes, your money should be able to beat inflation in the long run.

Understanding where to put your money is only one part of the puzzle. ‘Picture abhi baaki hai, mere dost!’ To beat inflation, a sizable portion of your money needs to be invested in the right asset classes.

Take a look at table 2 below. In these hypothetical portfolios, we demonstrate the total return (in percentages) that your money could earn over a 10-year period. We base these on the 10-year historical returns for each asset class (from table 1).

This is a simplistic forecast since history doesn’t always repeat itself. We recommend you look at your money holistically by considering your SB and FD accounts as part of your overall portfolio. This will help you understand if your money is actually working for you in the long run.

Table 2: Hypothetical portfolios

Let’s break this down. In each of the above scenarios, we assumed the total amount invested is INR 1,000.

• In Scenario A, 70% of a person’s wealth is invested in SB accounts and FDs. The remaining money is split equally across the other 3 asset classes.
• In Scenario B, 50% is in SB accounts and FDs. The rest equally distributed across the other asset classes.
• In Scenario C, just 30% is in SB accounts and FDs with the balance equally distributed.

Assuming a long-term inflation rate of 6%, Scenario A leads to wealth erosion, whereas Scenario B and Scenario C are able to beat inflation.

*The caveat in the above analysis is taxes. Post tax, the net returns will be a bit more muted.

But this then leads us to wonder, how much should you keep in your savings bank account? Just about enough to cover a couple of months worth of expenses so you are not caught in a tough spot.

In short, are you losing money? Yes, if you park most of it in banking deposits. At Mool, we nudge you to find balance by moving excess money into better portfolios. This way, you improve your relationship with money.

Mool’s carefully curated portfolios keep the ghosts of inflation away, permanently.