Investment in Gold, Sivler & Equity...Which is best, here is the answer

I came across an article on Investment comparison, All these days we have been taught to be very safe on investment, and I still remember my Mom and Dad used to invest in Fixed Deposits (FD), they never looked at Equity and according to them investing in Equities like  investing for losing money!!  Look at the comparison and yield from three different modes of investments...am surprised and thought provoking.....

Moral of the Story...invest in Equities and dont trade with equities....just invest in 'Blue Chip- Large caps' and monitor periodically, redeem at right time, it will be a good corpus for post retirement.

Happy investing!!!  Save Money, Save Future.
 

Article..... 

a)     34 years return – FD & Sensex

b)     34 years return - Gold & Sensex

c)     34 years return- Silver & Sensex

          Why 34 years? Only in 1979-80, Sensex came into existence with base as 100.

1)     Assume you’ve invested Rs.1 lakh each in FD, gold, silver and Sensex 34 years ago. As of 31’st March 2013 the value is as follows: FD- Rs.15.5 lakhs, Gold- Rs.37.17 lakhs, Silver- Rs.35.36 lakhs and Sensex- Rs.1.88 crores

2)     Unlike other assets mentioned above, Sensex has dividend yield in addition to capital growth. Assuming a dividend yield of 2% on an average, the Sensex returns work out to Rs.3.35 crores

3)     In terms of percentage, the 34 years return (as given above) is as follows: FD-8.39%, Gold- 11.21%, Silver- 11.05% and Sensex- 16.65% (18.65% if dividend yield is as assumed above)

4)     When we talk about returns, we’ve to talk about inflation too. The average annualized inflation for the above period is 7.63%.

5)     If Rs.1 lakh has been kept under the mattress instead of being invested, it’s value has come down to mere Rupees seven thousand (i.e.) purchasing power of rupee reduced by whopping 93% over 34 year period.

6)     What we should look for is real returns (i.e.) returns after inflation and taxes. Since tax differs from each asset class and income category, I’ve taken only inflation. Inflation is common for allJ   

7)     After adjusting for inflation, the asset classes have grown by following annualized rate in real terms. FD- 0.11%, Gold-2.72%, Silver-2.57% and Sensex- 7.74% (around 10% including dividend yield). These numbers matter a lot. This is what our wealth would have grown after adjusting for inflation. Since we know the tax details for each asset class and for our income, we can work out the return after taxes too. FD would automatically turn negative. Gold and Silver, despite run up in the recent years, would have provided a negligible return. Only equity would have provided a real rate of return of above 6%.

8)     In the long run, the best we can aim and get even in asset classes like equity and real estate is real return of around 4%+. Growing money is that difficult. More important is not loosing the money.

9)     Gold’s real rate of return of 2.72% is made possible due to rupee significantly depreciating between 1980s to early last decade. Otherwise we might have got even a negative return. I’ll explain this by example. Assume the rupee dollar conversion rate is 1 USD = Rs.50. For illustration purposes, let us assume the price of 1 gram of gold is 1 USD. With the above conversion rate, the value of 1 gm of gold is Rs.50.  Imagine a scenario when rupee depreciates by 100% (i.e.) 1 USD = Rs.100/- The gold price remains the same at 1 USD. The value of our gold would increase by 100% to Rs.100/- though the price has not changed in the international markets and we being the net importer of gold.

10)  Any one who talks about increase in gold price for 50 years, 75 years or 100 years (I’m seeing many ads), without accounting for currency changes is fooling others. I’ve taken the gold price data from RBI. I don’t know about the authenticity of prices shown in many ads.

11) Please use FD for contingency or emergency funds. Let gold be part of social requirement and not exceed 5% to 10% of investment portfolio. Silver is again part of only social or cultural needs. Sensex / Equity is for building wealth. I believe real estate also can build wealth but has no reliable long term past data.

12) The last 5 to 6 years increase in gold prices have mainly come from speculators who invested in ETFs, gold futures etc. and not from jewelry demand. Speculators can move out as swiftly as they moved in.

13) There are people who are saying gold would not go below $1300 as cost of production (break even price) is the same amount. Gold is not a typical consumer product which is sold at cost plus profit margins. Gold miners do not decide the gold price. They merely enjoy or suffer according to gold prices. Gold prices are influenced by a number of complex factors whereas fresh supply from miners is less than 2% of the annual demand.