A majority of Indians still consider Fixed Deposits and Life Insurance as good investment products. Why is this the case? Investments in Fixed Deposits and Life Insurance amount to double or even treble of the amount invested by Indians in Mutual Funds. This is completely absurd.
Does the average Indian not understand the concept of Inflation? The Consumer Price Index which is the benchmark of inflation in prices of goods used in the day to day life, has been hovering around the six percent mark over the last decade. This means that the goods you purchased for ₹ 100 last year cost you ₹ 106 this year. The goods that you could purchase for ₹ 100 five years ago, cost ₹ 135 now.
Fixed Deposits have been giving an annual interest of 6%-8% for the last few years. Returns given by Insurance products such as Endowment policies and Money Back policies do not cross the 6%-8% per annum mark either. Which means that your investments in Fixed Deposits and Life Insurance have been growing at the same rate as inflation. In other words they have not been growing at all in real terms.
Equity based Mutual Funds on the other hand have given real returns of over 6%-14% over the same period. Real Returns means returns generated over and above annual inflation. Also the probability of losing money (the main reason why most indians invest in FDs and Life Insurance) over a period of five to ten years or more is practically zero. This is because the probability of the Sensex or Nifty being lower than what it is today, after five years or ten years is practically zero. And the probability of the Sensex and Nifty growing at a compounded annual rate of ten percent or higher is very high.
I have tried to convince Investors in Fixed Deposits and Life Insurance to shift to Mutual Funds but I am not sure how much I have succeeded. Also Life Insurance is a product for protection. It should not be looked upon as an investment tool. Equity Shares and Equity based Mutual Funds have given superior returns as compared to Fixed Deposits, Life Insurance as well as Real Estate over the last ten, twenty, thirty or even more years.
Related reading: are mutual funds better than fixed deposits?, and life insurance: what you need to know.
