Take some risk with investments to reach your financial goals

Over the past decade, financial services have become increasingly easily accessible. From bank deposits to mutual funds, from equities to insurance, all are now available online. While Know Your Customer (KYC) norms still create some pain, the procedures themselves have gotten simpler. 

Even so, Indian investors remain enamoured with risk-free investments. Putting money in the bank gives investors a sense of safety. After all, who wants to take risks with their hard-earned money? This sense of safety arises from familiarity. Young graduates entering the workforce, have grown up knowing only fixed deposits and life insurance policies their parents. Our parents may have a deep distrust in the government, but still trust government-owned corporations that handle their investments. Hence they want to put their money in these seemingly safe avenues.

What neither the current generation nor their parents realise, is that modern living comes at the cost of shelling out more than what is in your wallet. The rate at which we replace the gadgets we use is not an expense our bank balances will support. While the savings in our bank chugs at 6-7% per year, prices of many essentials zoom faster than that every year. 

Your dream Europe tour and the retirement home with a backyard garden, slip even farther away. And suddenly, you find yourself scrambling to augment your retirement corpus at the age of 50, by cutting down on the Saturday night outs.

But all this doesn’t have to be. A little bit of planning can put your money on steroids. And while the Olympic committee might frown on performance enhancing drugs, this method of earning money is perfectly legal. And you face a serious threat of being left behind if you don’t take adequate measures now. How serious can it get? Look at the illustration below to know.

Consider friends, Prabhu and Mahesh. The duo, who had been friends since school, retired on March 31, 2018. Prabhu, the son of a lifelong public sector bank employee, had full trust in government institutions. Mahesh was born to an economist father. Having learnt economics from childhood, he had trust in capitalism. Consequently, Prabhu invested his money in Public Provident Fund, while Mahesh went all out and invested his money in mutual funds. 

Leading a similar lifestyle, Mahesh estimated they would need around Rs 3 crore for retirement. Both of them invested Rs 1 lakh at the beginning of each financial year since 1997. As of March 31, 2018, Prabhu had accumulated Rs 60 lakh in PPF, while Mahesh had accumulated Rs 3.61 crore in MFs.

Mahesh used Rs 15 lakh out of the extra Rs 60 lakh he had accumulated for a post-retirement Europe tour with his wife. Prabhu sat wondering how he was going to get through his retirement.

At first glance, the difference looks too good to be true. The corpus accumulated in MFs is more than six times that of PPF. However, before dismissing it as farce, we need look at the returns. The annualised returns are 8.75% in PPF and 22.1% in MF. The stock markets have seen four separate bull runs during this period. With this knowledge, the figures start to look more believable.

Of course, the returns in future may not follow the past trends. Returns in equity will come down, but so will the return on PPF. The difference in corpus over the next 20 years may also be smaller. But if the past is any indication, you will miss out if you do not invest in equity.

Putting your money in banks may keep your money safe, but can put your retirement plans in jeopardy. By not taking risk with your investments, you are taking risk with your financial goals themselves.

The writer is principal research analyst at FundsIndia.com