I am not sure how many of you read through an article that The Economic Time published, but it prompted me to do a post on it. The article showcased the fact that bank FDs have returned more than Sensex since 1992. It was a bit startling because we have always heard about long term investing and how equity always returns more than other investment avenues. So how is this possible ?
As you can see from the Infographic below, the Sensex was quoting at 4,285 in 1992. Considering the latest returns on 17,404, the annualized return on the Sensex turns out to be 7.26%. However, if the same money was invested in fixed deposits with commercial banks, the return of which changes year on year, and rolled over each year, it would have grown to Rs 21,306.
And if 5 years FDs were used, the corpus today would have been Rs 30,361. That is more than what the Sensex returned – Rs 17,404.
That is what the bank FDs article has discussed
The takeaway is that during many years the Sensex has languished and given negative returns. It does not give consistent positive returns always as do the bank FDs.
Another lesson learnt is that when investing in equity, timing the entry is also important. And since ordinary investors cannot do that, systematic investment planning in mutual funds is the best way to go and invest your money.
The original article is here.
Make sure you read the comments to check whether this argument holds water !
Does the FD returns consider the tax component? It’d make more sense to see the returns post tax, may be for all brackets?
@Vivek,
I have seen adds of some banks where for 5 year Tax Savings FD you would get 18% returns for 30% tax bracket which includes the tax component. This is another way to lure investors.
Even I have seen such ads but I am sure there is a catch to it when you go into the detailed calculation of net returns. I generally ignore such ads because I know they are never true, it’s a waste to time.
Hi Rakesh,
As per my understanding, even for the 5 year tax saving FDs, you need to pay tax on the interest component. The only benefit in investing in such FDs is that we get a rebate on Income of that year in which these FDs were booked.
Do you agree with this view ?
Regards
BFA
@BFA,
Yes, I agree, its for people who do not want to invest in PPF or MF.
Moreover the tax rates for this scheme is much less than the normal FD offered by bank.
Very interesting!
@Vivek even if we subtract 30% as tax from tax saving FD it better than sensex returns!
Radhey: How would you react if a client walked into your office tomorrow with this article in hand stating: “you told me only equity beats inflation in the long run. The numbers dont prove it. Please explain!!??”
My cousin would always criticize me saying its more important to protect the principle and get some return instead of wild fluctuations. I cant face him now!
I dont know what to think. Except to ask am I missing something?
I hope my father doesn’t come across this article otherwise like you can’t face your cousin I won’t be able to face my father. He also keeps preaching me about saving principal money and not get greedy about the returns.
@TheWealthWisher,
Good analysis, I am surprised to see FD beating Sensex.
If one were to invest just 4285 in tax savings FD then the returns are more since you can keep reinvesting the principle+ return without attracting tax bet 1992 and 2011.
However if you were to invest 1 lakh in a tax saving FD then the you will need to pay tax at least 3 times bet. 92 and 2011 which I think would lower returns than the sensex.
For ordinary FD you can keep reinvesting the amount without taxation in between but if you were to close FDs in 2011 then 30% tax lowers the returns than the sense.
Hope I am right in the above assumptions.
Given this info, a comparison bet. MF SIP, RD, and monthly FDs (all ending Dec. 2011) from Jan. 1992 would be quite interesting. I think only then can we convincingly conclude about the superiority of MF SIPs. Intuition suggest MFs may win but once should look at actual nos before jumping to conclusions.
However over 30 years Sensex beats FD by a long way (after adjusting Inflation)
http://wisewealthadvisors.files.wordpress.com/2012/04/30-years-comparative-chart-on-fixed-deposit-and-sensex-adjusted-for-inflation4.pdf
This is reminding me of this song .. “confusion hi confusion hai, solution ka pata nahi..”
What does it tell us? Don’t invest in equity? Are all equity investments return less than FD over 20 years but they are better in 30 years? Then what happens to the goals where we expect equity to return 15% in 15-20 years?
I am keen to hear answer of 2 critical questions Pattu asked viz. MF returns in long term and how do you handle the client with this article in his hand? If I had a financial planner I’d be knocking his door Monday morning for sure.
Till someone proves the above theory void, all I can say is..
All ij well
All ij well
All ij well
🙂
Guys,
Honesty, I expected someone to trash this article.
This ain’t correct. How can equities return more than FD ?!!!! That is against the basic principle of what we all learnt.
But the fact that you believed what I wrote still means that you are ready to believe what is out there in the newspapers.
So lesson learnt is do you own R&D, challenge anything that does not go with the flow. To an extent, Rakesh has done that !
When I read this for the first time in The Economic Times I was intrigued. How could this be possible.
I knew it was not the truth. And I searched for someone who would have already trashed it.
And Rakesh has already pointed out the article that justifies why this cannot be correct.
So hope over to the below article, read it and leave your comments here :
http://wisewealthadvisors.com/2012/04/06/must-read-im-saying-this-for-first-time/
Do not worry about explaining to your brothers and dads that FDs returned better over equity – they did not !!!!!!
Equities always return more over a long period of time, let us not shake our faith and belief in that !
Yes you right. It was a little stupid of me. I know nothing about div. yield.
I think deep down I am uncomfortable with equities. Although I am mostly investing in equities I do because of articles like Muthu’s. I guess this ET article brought out my general discomfort about fluctuating returns.
I read Muthus article and have the following questions:
1. He says: “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, …”
How realistic is this assumption. If div yield is crucial and is not available in the public domain how accurate are such calculations?
2. Now I wonder how much a similar calculation for the last 20 years would show.
Should be easy enough to work given the pdf data.
The point is can I pick any 5-10 year period where I can show the discrepancy is not so much?!
3. I still am curious to see the comparison bet MF SIP and FD SIPs and RD.
Also the sensex gave negative returns for 11 of that 33 year period. So could we assume a div yield of 2% for those years?
An inflation adjusted return difference of 11 lakhs suggested that even if we set div. yield as 0% through the 30 year period the returns should not that different even if not the same.
I once studied US equity indices in which a retirement porfolio is invested entirely in equities. The corpus last anywhere bet. 30 years and 2 years.
So although my reactions were stupid, I am not so sure the answer is that straightforward for lump sum investments.
Eeeeeehhhhhhh based on what we started investing into MF / equity products ???? Most of us not blindly. Did someone explain us?? Yes. Then he would have shown us the data to prove that he is right. If that data was good enough to beat inflation, then suddenly what happend. So as the Radhey saied, we need to research :). I have learned a good lession again by this article, self research is really required before we believe something.
‘Samay samay balvan nahi balvan manav, Kabe Arjun lutiyo vahi dhanus vahi ban.’ Time/situation matters, Market is going through some bad phase, and so some bad news makes people worried. 2007-08 is considered, return could be lesser. Our hero is going through bad times that doesn’t mean it’s not hero:).
Great Rakesh !!!!!!
As the market is volatile, the diversification concept is here which helps protecting capital at any given point of time. And for the same reason, based on time we realign diversification %.
Correct typo while reading, got confused while changing TheWealthWisher to Radhey ;).
You are right Chirag, we need do our own research. that is the key !!
When we start investing we don’t know the fundamentals of investing and financial products and we blindly follow the expert advise. Every expert has data to back his/her theory. How often have you seen expert LIC agents showing data to investors that convince them to buy the policies?
So, I don’t think expert advise can always be taken at its face value. There is always a degree of uncertainity with every expert advise, which is revealed by such articles.
I am not an expert to evaluate this article but it is an eye opener for sure and telling us to be watchful.
Yes Vivek, we are not that expert to evaluate this article. Feeling somewhat good to have Radhey’s and Dr Muthu’s comments here.
I was thinking to sit few days, schedule some time next month and re-analyze few fundamental things. Just want to do a re-check, even if I understand or not atleast some self satisfaction will come. I would like to say one more thing here. See this is the reason, one need a financial planner. Dr Muthu said even financial planners are not perfect. Still they are better than normal investors.
Whatever…. this article has created some ‘Keedas’ inside us ;).
We all remain busy with our work and to go deep in these things time and expertise is required. This is the job of Financial Planners/Financial Advisors and they can do it better.
sorry one more! If dividend yield is ignored equity still scores over FDs over 33 years. So if that is the only mistake the ET article did and if we add the 2% yield as Muthu suggested, over the 20 year period considered by the ET article FD still score a little more than the sensex.
So it would be hasty to conclude the ET article is wrong. The central message of the ET article is lumpsum investments depend on the time of entry and exit. Everyone agrees with this.
Essentially, yeah, FD did score over Sensex in the 20 year period. In that sense the article has correct calculations. Your inference on the article’s main message is also correct.
Guys,
Dr Muthu has been kind to reply to me after I pointed to him Pattu’s questions. Here is his reply –
————————————
Dear Mr.Radhey Sharma,
Thanks for writing.
For the sake of your readers, I’ve reworked the file based on the same period mentioned in the newspaper. I’ve attached the file herewith. Here
Still Sensex score over FD. As dividend yield data is available in BSE from 1991 onwards, I was able to use the same.
I’ve nothing against media. Since they’ve to write something every day, relay things 24/7, there is not much of real content and they have to capture our attention by being sensational.
For an ordinary investor (of course nothing extra ordinary about usJ) who is unable to differentiate between noise and information; he would be much safer focusing only on his investments and not on media.
One of the most cited argument of a prolonged bear market is DOW almost remaining at the same level for 17 years between 1965 and 1982. Indices like Dow & Nikkei are price weighted indices and followed most out of tradition. In the same bear market mentioned above, the S&P 500 which is market capital weighted and broad based index gave an annualized return of 7.1%.
Even taking the case of Dow in the example above, no one is accounting for dividend yield. Dividends yields can in fact be higher in bear markets if the underlying companies are doing well and only stock prices are depressed.
Though I may not agree with all Ken Fisher says, I’m definitely learning to look at data in a different perspective because of reading him.
If you want, you may publish my response along with the file.
Regards
Muthu
———————–
Mr. Muthu thanking for making the calculation.
The point is not about who won but by how much. Comparing the 20 year period and the 33 year period wrt sensex is like comparing apples and oranges. But wrt FDs its more like comparing
jucier apples with skinny apples.
The sensex may have won for this 20 yr calculation but only just. Yes if you include tax for an investment of 1 lakh the margin is bigger but for for a much lesser investment FDs may be comparable to sensex even after taxation.
I may have invested a sizable portion in MF SIPs because that is what the experts tell me to but my deep discomfort about equities remain. Which is why I am constantly looking for mutual fund success stories like someone who started in the early 90s and saved for their child/retirement etc.
Few other issues (this does not refer to Radhey or Muthu)
1. You hear ‘expert advice’ like if you goal is more than 3/5 years away then MF sips is the way to go.
2. In response to I have 3 lakhs to invest, I dont need the money for 10 years where should I invest? The answer is invest in MF over many months by splitting the 3 lakhs.
Reg. 1 if look at these calculations you will understand how uncertain the markets can over short periods lump sum or sip
Reg.2 If the 3 lakhs is split over 6 months of investment 8/9 years away for practical purposes it is like a ‘lum psum’ investment
Yes I agree with Muthu and Radhey, dont believe everything you read/hear. Ending that sentence from the media is too vague. Financial experts are as human and as incompetent as any other man. So whether they are certified financial planners or certifiable financial planners is luck and as uncertain as the sensex. (No offense is intended to anyone in particular. My point is paid or unpaid advice there is an element of uncertainty involved. The same uncertainty exists when you go to a doctor!).
I am not sure if you have read Jim Otar’s retirement calculator and his book. His retirement calculator calculates how long your corpus would last if you invest 60% or so in stock by repeatedly changing the retirement year from 1900 to 2011. I made a similar calculator for the sensex which is nearly. If anyone is interested I can complete it and send it over.
Thanks again to Muthu and Radhey. I would like to reiterate that I mean no offense to anyone.
I am assuming it is the same retirement calculator you sent to me sometime back, I am guilty of sitting on it but I know for sure I will look at it.
No this is different. This is based on
http://www.retirementoptimizer.com/
I wrote it in a platform known as Labview. This is again more for reflection than for actual use.
I forgot to acknowledge Mr. Muthu has said long term is at least 10 years in his pdf file. I strongly agree with this.
I just happened to visit the site and see the comments now.
Even planners are not perfect. I’ve no problem in saying this.
Infact I wrote this to my client as well and posted in my blog too:
http://wisewealthadvisors.com/2012/03/30/your-questions-myths-and-my-answers/
Mr.Pattu should be happy to read this:-)
Excellent post Dr Muthu, privileged to have your comments here. Many thanks.
Dear Mr. Muthu,
Reading this
“I don’t know who coined the term ‘personal finance’ but it is an apt one. It is personal; depending on your life and money situation, generic rules simply don’t apply.”
was spine tingling!! Terrific. I have been saying this for many years now. Many finance experts have got angry with me!
At last a voice of reason.
Muthukrishnanukku whistle podu!
I don’t think this article can be trashed because it does provide facts.
Mr. Muthu said we need to consider taxes, which is the point I raised earlier but is it guaranteed that 20 years down the line equities won’t be taxed? Looking at current trends my guess is it’d be taxed, which will impact the returns big time.
Mr. Muthu also suggested including dividend yield, which is not available in public domain. I share the same concerns on this point as Pattu does. It is like bonus percentage that LIC agents use to sell the policies. It is not known, it is not guaranteed.
The comparison of 20 years vs. 33 years is something I don’t find useful. The fact is sensex can return lower returns in long term. Moreover, in reality the long term goals are ranged from 15-25 years. So, investors would be interested in the data that is matching their goal range.
When you start something new you have a range of opportunities to grow, possibilities are endless but as you grow and progress the window of opportunity starts becoming narrower. If we apply the same theory to sensex, it answers the growth of 33 years as compared to 20 years.
My trust is not shaken in equities and I am not saying do not invest in equities after reading this article. I still believe that equity is the only instrument that has potential to beat the inflation and give you enough returns to meet your long term goals.
However, I’d be more watchful about my equity investments and book profits when I get 15-20% returns irrespective of the goal duration.
Moral of the story [for me at least]: Investing for long term in equities does not always guarantee high returns.
Would be interesting to know how investments in MF via SIP fare against FD. Wonder if we would have old data to check the figures.
I had the similar thought Rakesh. It would be interesting to compare few good MFs SIPs against FD, that way MF would win I think. ValueResearch has the tool for SIP return calculations.
MF category return can be compared against FD. Then again is it general / Large Cap / Mid Cap which category ;). That way many options are coming. Making it little too much LOL.
I too read this article and was surprised. Anyway, this related link has a nice point that data can be manipulated according to your goals. It shows a 21 yr comparison and a 17 yr comparison of the Sensex vs FD (i.e. both long term) and demonstrates opposite results.
http://apnaplan.com/stocks-vs-fixed-deposit-which-is-better/
Things to consider –
1. While 5 yrs FDs provide tax relief under section 80C (up to a limit), the interest earned is taxable. Long term (i.e. more than a year) profits from stocks do not attract any tax (as per current tax laws and the DTC).
2. Sensex returns shown in these comparisons do not take dividend payouts into consideration. Shouldn’t the Sensex TRI be used? Dividend is also tax free in the hands of shareholders (though dividend tax is paid by the company).
3. All these comparisons are made for lump-sum investments. How do SIPs fare vs say recurring deposits? SIPs/recurring deposits are more suitable for salary earning people. SIP on 1st of every month starting from April 2000 till date would have returned 14.6% in UTIs NIFTY Index Fund which is a suitable proxy for the NIFTY itself.
Data Manipulation is not the same as mis-selling. Showing one one set of data to sell a product is miss-selling. Since both sets of data are correct there is no manipulation involved.
Viveks last comment summarizes the situation quite well.
Another dig at the news –
http://www.moneylife.in/article/fixed-deposits-beats-stocks-financial-writers-need-financial-literacy-first/24946.html#.T4a0KeXRJEY.facebook
Thanks for sharing this article. I really liked the first point to trash this theory, the comparison of arbitrary dates. I guess it makes sense. Why didn’t they pick 1991 or 1993?
Also, the last point – who buys Sensex? How can you compare a product that no one buys [sensex] with the one that everyone buys [FD]? The comparison would make more sense if it was done with an average or above average performing stock.
We have already discussed a lot on tax, dividend and SIP bits but they alone were not very convincing up until now.
I guess the original article was written with different intentions and not to do any favours on the investors. I knew TOI was a trash paper but now ET too..?
Thanks wealthwisher team for busting this newly created myth!
P.S. “Financial writers need financial literacy first” – Indeed!
@Vivek,
Yes i think banks might have paid to writer to write such a post. Moneylife has been doing a great job of educating investors for the last few years. To me they are whistle blowers off many scams and such products.
Personally speaking, I invest quite a lot into FDs, however none of my FDs are of duration less than 10 year. I always want to ride upon the power of compounding. I often get questions / apprehensions from my clients when they express their concerns over such a long duration FDs. I was even challenged once by an employee of SBI who said that in his 25 years of service, I was the first customer booking a 10 year FD ! I just replied him back saying that whose mistake it is if people can’t see the benefit behind it – gave a bank employee a small crash course on his own FD product :). Check out the items related to FDs which I firmly believe in when it comes to FDs. http://insight.banyanfa.com/?p=103
I completely agree with this return chart produced in this article. The returns from a FD can also be diverted into a SIP of a mutual fund to create a self funded capital protection scheme.
Regards
BFA
@BFA,
Wow, 10 years FD, my uncle used to book for 5 years at one go. But don’t you think sometime it would be disadvantage given the uncertainty of interest rates.
For eg if we book a 10 year FD at 8% and then after a couple of years the FD rates goes up to 10% ( the current cycle that we have been seeing) we would loose on that additional 2%.
Hi Rakesh,
True, hence the ten year FD funda works the best when the interest rates are at its peak, such as now. But the same is true with all asset classes, isn’t it ?
Regards
BFA
Good idea for long term FDs and take advantage of the power of compounding. You think there is any downside of this, which one should be aware of?
Hi Vivek,
Probably the only downside is liquidity and urge to redeem the FD’s before the due date. For that you have multiple options :
1. Take a loan against the FD for short term financing so that you don’t have to liquidate your FD booked at an excellent rate;
2. Book your FD’s in small chunks so that if you need emergency 50K out of your 500K FD, you don’t have to liquidate your entire 500K FD. I have stressed upon it in quite detail on my article.
Regards
BFA
For point number 2, online FDs give this option to break FDs automatically in multiples of 1000s even though your FD is in lacs.
Suppose you have an FD of 5 lacs and you want 50k, only 50k will be taken out of 5 lacs and will attract penalty. Rest 4.5 lacs will continue as it is.
Did you guys see this?
http://capitalmind.in/2012/04/chart-the-great-indian-stock-market-story-was-only-5-good-years/
@Pattu,
Interesting read, will scare more investors……
The last sentence speaks it all “FD at 8% in 2007 would have beaten stocks to date, and five years is long-term in most investors’ books. ”
But i don’t think it would fare to compare Sensex with FD based on the returns of the last 5 years.
Vow, another nail in the coffin for equities ?!!
Time to be wary ?
I think they are all piggybacking on the ETs article to gain popularity.
Again coming to the question who invests in Sensex and why? One should pick good equity stocks or MFS and I am sure it’d show better results. Why everyone is picking on Sensex and not MFs?