Choose Your Investments Carefully and Mindfully

We are living in different times. The distinction between needs and wants has blurred. What was considered a luxury a couple of decades ago has become a necessity today. Cars, two-wheelers, air-conditioners, Wi-Fi, smartphones, laptops, OTT subscriptions, supermarket shopping and visits to shopping malls have become integral to our lives. Imagine spending an entire day without the internet or a mobile phone!

Three decades ago, life was less complex, and our financial needs were relatively modest. Fixed deposits offered returns of around 14% per annum, while inflation hovered around 8%. The healthy gap between deposit rates and inflation meant that traditional investments could deliver reasonable real returns. A life insurance policy, bank deposits and post office savings were often considered sufficient for a household's financial needs.

Fast-forward to today. Retail inflation typically ranges between 5% and 6%, while relatively low-risk investments offer around 6% to 7%. After accounting for taxes, the real return can be negligible or even negative. Relying exclusively on traditional investments may therefore be inadequate to preserve and grow wealth over the long term. It is time to look beyond the familiar and explore other investment avenues. Understanding Our Investment Choices Broadly, the common investment avenues available to us can be classified into two categories: Traditional instruments - relatively easier to understand

• Bank deposits, post office savings and government-backed instruments

• Real estate

• Precious metals such as gold and silver

• Traditional life insurance policies

Market-linked instruments - requiring greater understanding

• Stocks

• Mutual funds

  
  

Most investors gravitate towards instruments they understand and perceive as safe. Deposits promise predictable returns, gold carries emotional and cultural significance, real estate enjoys widespread trust, and traditional insurance policies offer defined benefits. These instruments have stood the test of time and continue to find favour across generations. But should familiarity alone determine our investment choices? Looking Beyond Familiarity Consider bank deposits. While they offer predictable returns, do they consistently beat inflation by a comfortable margin? Often, they do not. An investment must do more than preserve the nominal value of our money; it should help preserve and grow our purchasing power. Ideally, investors should seek returns that exceed inflation by a reasonable margin after taxes, while accounting for the risks involved. Gold and silver present a different challenge. In India, precious metals are often purchased with affection and pride, passed down through generations, and rarely sold unless absolutely necessary. Physical gold and silver do not generate interest or dividends. Their value depends largely on price appreciation, and ownership involves costs such as storage and, in some cases, making charges. They may serve a useful role in a portfolio, but concentrating wealth in them can limit its productive potential.

Real estate, particularly investment beyond one's own home, demands substantial capital. Rental yields are often modest, while maintenance, transaction costs and taxes can reduce overall returns. Properties are also relatively illiquid and cannot easily be sold in small portions when money is needed. Traditional life insurance policies, too, may not generate returns sufficient to beat inflation over the long term. Insurance and investment serve different purposes, and it is important to evaluate each accordingly. Is It Time to Rethink Our Choices? This brings us to stocks and mutual funds - instruments many investors consider risky and consequently avoid. Yet, avoiding market-linked investments altogether may expose long-term wealth to another risk: losing purchasing power to inflation. The answer is not to abandon traditional investments or blindly embrace market-linked ones. Every instrument has its purpose, advantages and limitations. The key is to understand how each works, what risks it carries, and whether it aligns with our financial goals, investment horizon and ability to withstand uncertainty. The real risk lies not merely in choosing a risky investment, but in choosing an investment without understanding its purpose. In the next edition, let us explore stocks and the stock market, understand how they work, and discover why they deserve a place in our investment decisions.