Wealthy Mindset

Tag: risk

  • Exploring Non-Equity Alternatives to Fixed Deposits (FDs) in India

    Fixed deposits (FDs) have long been a popular investment option in India due to their perceived safety and steady returns. However, it is important to note that FDs are not completely risk-free and there are several potential risks associated with this investment option.

    One risk is bank failure, where the bank is unable to meet its financial obligations and is unable to return the invested amount to the depositor. While depositors are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) for up to INR 5 lakh per bank, it is still a risk that must be considered, especially for small banks that may not have the financial stability of larger banks.

    Another risk is the impact of taxes on FD returns. FDs offer tax-free returns for investments up to INR 5 lakh per financial year, but the returns may be subject to tax for higher amounts. This can significantly impact the overall returns from FDs and may result in lower post-tax returns.

    In light of these risks, it is important to consider alternative investment options that may offer potentially higher returns with varying levels of risk. Some options include corporate bonds, debt mutual funds, liquid mutual funds, treasury bonds, Public Provident Fund (PPF), National Savings Certificate (NSC), Pradhan Mantri Vaya Vandana Yojana (PPVVY), and Senior Citizens Saving Schemes.

    Corporate bonds are debt instruments issued by companies to raise capital, and offer higher returns than FDs with an average interest rate of around 8-9% per annum. However, there is a higher risk associated with corporate bonds as the issuer may default on their payments. It is important to do thorough research and invest in bonds of reputable companies with good credit ratings to minimize this risk.

    Debt mutual funds invest in a variety of fixed income securities such as corporate bonds, government securities, and money market instruments, and offer potentially higher returns than FDs. However, they also carry a higher level of risk as they are subject to market fluctuations and the credit risk of the underlying securities.

    Liquid mutual funds, also known as money market funds, invest in short-term debt instruments such as commercial papers, certificates of deposit, and treasury bills. These funds offer relatively lower returns than FDs, but also carry a lower level of risk as they invest in highly liquid and low-risk instruments.

    Treasury bonds, also known as government securities, are issued by the government and offer relatively lower returns than FDs but carry a very low level of risk.

    PPF, NSC, and PPVVY are government-backed investment options that offer tax-free returns and a higher level of safety compared to FDs. However, they also have certain drawbacks or limitations such as fixed tenure and restrictions on withdrawal.

    Senior Citizens Saving Schemes are specifically designed for senior citizens and offer higher returns than FDs, but also have a fixed tenure and restrictions on withdrawal.

    When comparing FD returns with these alternatives, it is important to consider the risk, drawbacks, and limitations associated with each option. It is advisable to consult a financial advisor or expert to ensure a well-diversified investment portfolio and minimize risk.

    In conclusion, while FDs offer a safe and steady investment option, there are several alternatives such as corporate bonds, debt mutual funds, liquid mutual funds, treasury bonds, PPF, NSC, PPVVY, and Senior Citizens Saving Schemes that offer potentially higher returns with varying levels of risk. It is important to carefully consider the risks, drawbacks, and limitations associated with these alternatives and do thorough research before investing.

  • The Eighth Wonder of the World: Understanding the Power of Compounding

    The power of compounding is a well-known concept in the world of investing, but it is often misunderstood or underappreciated by many investors. Simply put, compounding refers to the ability of an investment to generate returns not only on the initial investment, but also on the accumulated returns over time. This means that the longer an investment is held, the greater the potential for growth.

    In fact, Albert Einstein is famously quoted as saying that “compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” This quote highlights the importance and potential impact of compounding on an investment over time.

    One of the main reasons why it is important to start investing early in life is to take advantage of the power of compounding. The earlier an investor starts to invest, the more time they have for their investments to grow and compound. This can be especially beneficial for those who are looking to achieve long-term financial goals, such as saving for retirement or building a financial cushion for the future.

    To understand the power of compounding more clearly, let’s consider the following examples:

    • If an investor starts investing Rs. 10,000 per month for 15 years at an annualized return of 12%, their total investment would be Rs. 21,60,000, and their final corpus would be Rs. 72,06,328. This means that the investor would have earned a total return of Rs. 50,46,328, or about 134% of their initial investment.
    • If the same investor starts investing Rs. 10,000 per month for 20 years at an annualized return of 12%, their total investment would be Rs. 28,80,000, and their final corpus would be Rs. 1,35,84,906. This means that the investor would have earned a total return of Rs. 1,07,04,906, or about 372% of their initial investment.
    • If the same investor starts investing Rs. 10,000 per month for 25 years at an annualized return of 12%, their total investment would be Rs. 36,00,000, and their final corpus would be Rs. 2,61,10,504. This means that the investor would have earned a total return of Rs. 2,25,10,504, or about 625% of their initial investment.
    • If the same investor starts investing Rs. 10,000 per month for 30 years at an annualized return of 12%, their total investment would be Rs. 43,20,000, and their final corpus would be Rs. 4,15,86,836. This means that the investor would have earned a total return of Rs. 3,72,66,836, or about 862% of their initial investment.

    As these examples illustrate, the power of compounding can have a significant impact on the final corpus of an investment, especially over longer time periods. This is why it is so important to start investing early, as it gives investors more time to take advantage of compounding and potentially earn higher returns.

    It is also worth noting that the annualized return used in these examples is just an estimate and is not guaranteed. It is always important for investors to be mindful of the risks involved in investing, and to make sure that their investment portfolio is well-diversified to manage risk.

    In addition to saving for long-term financial goals, the power of compounding can also be beneficial for investors in other practical ways. For example, an investor who starts saving for their children’s education early on can potentially earn higher returns and have a larger corpus to cover the costs of tuition, books

    and other expenses. Similarly, an investor who starts saving for a down payment on a house early on can potentially earn higher returns and have a larger corpus to put towards the purchase of their home.

    In conclusion, the power of compounding is a powerful tool for investors, and starting to invest early in life can be a crucial factor in achieving long-term financial success. By taking advantage of compounding and starting to invest early, investors can potentially earn higher returns and achieve their financial goals more easily. Whether it is saving for retirement, a child’s education, or a down payment on a house, the power of compounding can be a valuable asset for investors of all types.