This is an excellent research on Indian Investments/Inflation done/written by D. Muthukrishnan
We always discuss about various asset class, the need for equity to be part of portfolio not only for capital appreciation but even for capital preservation.
I’ve been looking for data in public domain which captures last 33 years (since 1979-80 when Sensex base was kept at 100) of returns from Fixed deposits, Gold, Silver and Sensex, duly adjusted for inflation.
I was unable to get the same.
Few days ago, I saw in a newspaper how FDs have scored over Sensex in the last 20 years. I was surprised with the comparison and I felt it was out of context. Firstly Sensex was at around 45 multiples twenty years ago due to Harshad Mehta pumping lot of money illegitimately from banking system. Currently the market is on sideways or consolidation phase for the last few years with around 15+ multiples.
Not only that when you calculate Sensex returns we’ve to take into account dividend yield. The data given in the newspaper has captured only capital appreciation but completely ignored dividend yield which is must for a proper comparison.
Also post tax return from any investment also needs to be looked into. The huge tax benefits in equity over FDs have been completely ignored.
It would have been better if the newspaper has also pointed out how a retail investor investing regularly would have benefited over the above 20 year period.
Likewise whenever people talk about returns of gold and silver; I see there is lot of misunderstanding and misconception on long term return part.
When I happened to chat with Kashyap Vyas, an excellent professional and a good friend of mine from a fund house; we hit upon on idea to collate ourselves what we could not find in public domain and then share the same in public domain.
I worked on the idea using him as a sounding board for certain clarification and inputs.
The notes in the above files have all the details about source of data, assumption etc.
If you’ve kept as cash Rs.1 Lakh in a suitcase 33 years ago, its value is only Rs.7 thousand today. What it actually means? This means your cost of living has increased by 14 times (Rs.1,00,000/- divided by Rs.7000/-). To explain it little more, assuming the inflation rates are similar for next 33 years, the Rs.1 lakh you’ve today would be able to buy after 33 years goods worth only Rs.7000/- as on today’s value.
You can see for yourself what inflation has done to each asset year on year, for more than 3 decades. When we say, the investments have to beat inflation; some people have difficulty in connecting to what we say.
I’ll tell you a real life example. A family known to me is living on a corpus of Rs.10 lakh for more than 10 years, keeping the money in fixed deposit. Ten years ago, they were getting Rs.6700/- as monthly income (@8% interest per annum), which was sufficient to take care of their expenses. Now they are getting around Rs.7500/- as monthly income (@ 9% per annum). Their standard of living has extremely deteriorated because what 7k would purchase 10 years ago is lot more than what it can do today.
To put it in the words of Buffett:
“It makes no difference to a widow with her savings in a 5% passbook account whether she pays 100% income tax on her interest income during a period of zero inflation or pay no income taxes during years of 5% inflation. Either way she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous, a 100% income tax but doesn’t seem to notice that 5% inflation is economic equivalent.”
Sensex have given an annualized return of 16.92% in the last 33 years. Since every year dividend yield of Sensex is not available in public domain, I’ve not included the same in the year on year calculation. However assuming a dividend yield of 2% per annum, the annualized returns work out to 18.92%. So Rs.1 lakh invested in Sensex 33 years ago is now around Rs.1.74 crores. Adding the above dividend yield, the return would be Rs.3.04 crores.
The annualized rate of return for fixed deposits is 8.37%. So Rs.1 lakh invested in FD 33 years ago is worth Rs.14.22 lakhs today.
The annualized rate of return for gold is 11.22%. So Rs.1 lakh invested in gold 33 years ago is worth Rs.33.52 lakhs today.
The annualized rate of return for silver is 11.60% (more than gold!). So Rs.1 lakh invested in silver 33 years ago is worth Rs.37.44 lakhs today.
Still the above comparison has a catch. How to compare today’s Rs.1.74 crores or Rs.14.22 lakhs with that Rs.1 lakh 33 years ago. Money in two different periods is not comparable unless accounted for inflation. You can very easily relate to this. Many retired civil servants tell that they started as a clerk with a paltry salary of say Rs.100/- in 1955. You may feel that it is very less. But at an annual inflation of 10%, their salary would be worth Rs.23,000/- in today’s prices. Not bad, right?! It depends upon how well we’re able to understand the data
So the returns mentioned above for each asset class is nominal rate of returns. To compare what is 33 years ago with what is today, we’ve to adjust for inflation and arrive at real rate of return (detailed working is available in the files).
So Sensex at 16.92% annualized returns, after accounting for inflation is now worth Rs.12.54 lakhs. After including the dividend yield mentioned above, at 18.92% annualized returns is Rs.21.95 lakhs. Since I feel including the dividend yield is most appropriate, the capital has actually multiplied 22 times. For some reasons, you do not wan to account for dividend yield still the capital has multiplied 13 times. Let me repeat, this is real returns and not nominal one; as we’ve seen above, if we do not adjust for inflation, in nominal terms the capital has multiplied by 174 and 304 times respectively (without and with dividend yield).
Let us now look at other asset classes:
If we apply inflation adjusted growth, FD has grown to only Rs.1.02 lakhs today. Almost zero capital appreciation over last 33 years. As FDs are taxed based on accruals and not on receipts, even this return does not reflect reality. Since only after paying tax or deduction at source, compounding happens in FD, your capital (purchasing power) would have eroded significantly.
If we apply inflation adjusted growth, Gold has grown to Rs.2.42 lakhs today. Capital appreciation of 2.4 times over last 33 years.
For Silver, if we apply inflation adjusted growth, it has grown to Rs.2.7 lakhs today. Capital appreciation of 2.7 times over last 33 years.
Gold and Silver had a severe price fall over two decades beginning 1980 in international markets. We did not feel the impact because rupee depreciated a lot during the same period.
Despite all these if you see in the above files, in terms of inflation adjusted value, gold and silver (even FD too) was able to decisively cross the original capital only after 25 years; fuelled by extreme increase in gold and silver prices for the last 8 years.
Even to my surprise, I observed that Sensex at no given time at has gone below the original investment value after adjusting for inflation.
One Dollar was worth Rs.8/- in 1981. Whereas the conversion rate was Rs.48/- in 2002.
Gold prices fell from $892 per ounce in 1980 to $272 in the year 2000. A fall of around 70% in value over 20 year period.
When gold has depreciated by 70%, the rupee has depreciated by 600% in the same period.
So the gain we saw in the Indian market while prices fell globally was due to the depreciation in the value of rupee and strong appreciation in the value of dollar.
This further strengthened our illusion that gold prices never fall.
As I’ve said before commodities have longer cycle. It is mentioned that on an average bull markets in commodities last more than a decade and bear market nearly 2 decades. So despite gold and silver at somewhere in the peak of cycle, despite due to strong currency depreciation in the past decades, gold and silver has been able to deliver only above returns. I’ve taken only Indian prices of gold and silver for the last 33 years.
What if the prices of gold fall again globally say by 30% and rupee conversion rate remains the same? We would also experience a fall in prices.
Again what if the gold prices fall globally and rupee strengthens, say Rs.40/- to a dollar. It would be a double whammy. The fall would be more.
Commodities like gold and silver generally have longer cycles whereas stock markets usually have shorter cycles.
This creates an illusion the stock markets are instable and gold is stable.
In stock markets the recovery also may be faster but in gold the recovery may be longer.
Globally it took 28 years to get the same price for gold (i.e.) the highest price reached in 1980 was again touched only in 2008. Zero return for 28 years! Adjusting for inflation, a severe loss of capital.
I’m not against FDs or debt based products. You do know that I recommend them and suggest following the prescribed asset allocation.
But with out equity, you’ll not only be able to enhance wealth but even preserving wealth in terms of purchasing power is next to impossibility. The only exception may be people who have huge, really very huge corpus.
As I repeat, do not time the market. Enough studies and research has been done in this regard and the general pointer is, if you miss the best 1% of days (roughly 20 days) in 10 years, your return may probably equal a savings bank account return and if you miss 2% of days, you may not get any return at all or may even loose some capital. Instead of timing make investing a regular habit.
You may time only in the following situations- making lump sum investments when valuations are attractive, not making lump sum investments when valuations are expensive, start planning to phase out withdrawal a year or two before you near your goal – retirement, child’s higher education, daughter’s marriage etc. Again the term attractive or expensive valuation is relative. In a bear market, when you invest at attractive valuations, the markets can go further lower too and become more attractive.That’s fine as our investment outlook is long term and notional loss should not bother us.
Likewise it is very difficult to know what is an expensive valuation in bull markets. Bull markets are very euphoric and we may think valuations are high, still it may run higher for even few years. Only in hindsight we’ll know when the valuations get peaked out; that’s also fine. It is better to be safer than sorry. In bull markets, especially at later stages, it is better to continue only monthly regular investments and not make any lump sum investments.
Whatever I mention as equity is only applicable to portfolio of stocks like mutual funds or index. Individual stock picking is completely a different game and what I say should not be applied for individual stocks.
The only asset class missing from comparison is real estate. I wish there is a reliable, long term and broadly accepted indices for the same. In the absence of it, comparison is not possible.
You may tell me about a particular piece of property multiplied by hundreds of times in last 30 years. I can even tell stocks multiplied by thousands of times!
Likewise some property might not have appreciated much, illiquid, got into litigation, occupied by goondas etc. Like wise there are stocks which have vanished in thin air over the years. So we can only do comparison as a basket.
Though the real estate sector lacks any reliable and broadly accepted indices like financial assets, some studies peg the annualized return of real estate as an asset class around 12%. I’ve no idea what the real number is.
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