Monday, March 03, 2014

Sure you are getting “GOOD RETURNS” on your investments ? - MYTH BUSTED

Is 8% Return a very good return or is 10% a good return or for that matter, what good return on investment actually means for you? Ask yourself and you will get some kind of answer within and each individual will have different thoughts and different percentages in mind, as to good returns.

One of my friends younger brother invests all his savings in Insurance Plans and says “ Savings bhi, Returns bhi and Insurance bhi”- I don’t deny, yeh it is all true, but are this good returns? Again each might have different answers.

One other client of mine who is about to retire in around 3 years with falling under highest income tax bracket, was parking all his money in Bank Fixed Deposits. He said, “I am getting 9% returns in FDs and are safe and sure, so why not?”- Again each may have different answer-Right?

So going through with different kinds of members, prospects and family’s and understanding their different stages of life, Tax Brackets, Risk Profile, Market conditions, Inflation etc I strongly thought to clear doubts of all who are reading this, once for all.

Read this chart carefully before going ahead. 

(* & ** Please Refer to Disclaimer below for more in depth details)


Ok I will take you through each row and try and make it simple in brief-

= all general investment vehicles / options are listed in 1st row,
= then next row talks about Gross Assumed return in those investments,
= next row shows Avg. long term inflation, which clarifies that my expenses per annum are increasing by average 7% p.a.(taken on Long term basis, I know short term currently is too high than taken here)
= next row shows the net after inflation returns from my Investments. This one needs to be considered since my cost of an article is say Rs.100 today and next year for the same article I have to pay Rs.107, so if my investment is not growing by more than or at least equal to this, then I am actually loosing on my investments rather than gaining.
= next three rows shows Tax Payable on gross returns as per different tax slabs in India on Net @10% or @20% or may be @30%,as the case may be.
= next three rows shows Actual After Tax, After Inflation Returns, i.e. Real Returns on Investment Earned. This is what actually one should check before taking any investment decision.

Above, Assumptions are taken at two levels-
@- rate of return is taken for calculation purpose only and does not signify or guarantee any return
@- current Indian Tax Laws are assumed on each Investment vehicle.
*Gold MF and Debt MF is taxed @ 10% when sold after 365 days,(as per leading Mutual Fund AMCs Site)(Debt mutual funds profits, if any, can also be calculated as per Indexation and Taxed Accordingly)
Int. on FDs are taxed as per tax slab (assuming it is more than Rs.10000 p.a.),
Shares and Equity MFs are not taxed if sold after than 365 days,
**Real Estate Return is considered on sale after 3 completed yrs. @ 20%, withholding tax, (Many also Argue-“ I don’t pay tax I invest into 54 EC Bonds” -so that is at today’s around gross investment rate is @ 6% p.a., Which you now know what it actually yields ) (and of course there is also indexation option)
Maturity Proceeds on Traditional Life Insurance Policy is not taxable. And that Assumed returns on Traditional Life Insurance my range from 2% to 8% p.a. as per company, plan, age and term.
Above Figures are for representational purpose only ,and may not actually match the reality, eg Tax I have taken @ 10% is not actually @10%,bot other taxes are also aded etc.

The above chart must have shocked many and must have given clarity to lot of my dear friends, colleagues and kith n kin.

To make it clearer, I present following chart which would show same calculations based on same concept, but in Rupee Terms-

So, now one can see that a nominal rate of 9% FD return for a person who is in 30% Tax Bracket is actually a Negative Real Return Investment by 0.7% or actually the person is loosing Rs.700 on his investment
For that matter, why investment in shares or equity mutual funds is better then other investments ( of course need to say after considering other factors for different individual needs etc.)
Why for that matter Equity investment is better than Real Estate Investment.(after considering other factors)
Why Traditional Life Insurance policies are a hole in ones pocket (after considering  all other factors as per individual family's needs)
Why Real Estate investment is better than FD investment for a person who is in 30% Tax slab( after considering all other factors, it can be judged aptly)

(Please note-All above 5 statements are generalised statements,and may or may not be true to few, as such decisions are not only on returns basis but are very much individualistic in nature)

Now I am sure lot of regular investors would know what Good Returns they are getting till now and how Good Actually their Investment is.So now you have also been knowledgeable enough to understand that there's a huge difference in Nominal Rate of Return (basic Return or Interest) and Real Rate of Return (i.e. return after Inflation) and Real Rate of Return after Tax,RIGHT?and that Real Rate of Return after all expenses incurred in that investment including tax,is what is actually comming in one's pocket. (SHOCKED TO REALISE THIS TRUTH?)

I have defined here what “ Good Returns “ actually means and that investment decision should not only depend on what Rate of Interest the Investment is offering, but what would be your Real Rate of Return on the investment, which is quiet subjective and individualistic.This is where a Financial Plan and Financial Advisor helps and whole family plan is based on " Real Rate of Return,after expenses " basis.

(NOTE- I have put above charts only for understanding and simplicity to emphasize that higher real rate of return is actually good return, but the actual scenario is more subjective, complicated and individualistic in nature and calculations in real terms)

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