How mutual funds can help your investments in pace with inflation

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How Mutual Funds can help your investments keep pace with Inflation An Investor Awareness and Education Initiative from Deutsche Mutual Fund

March 2013


Inflation – How it eats into your savings

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12/5/2014 10:41:43 AM 2010 DB Blue template

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Q. What’s the world’s most popular retirement wish? A. To retire at 40 with enough money to live a comfortable life

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But how many of us know, how much money we need in hand when we retire, to be able to enjoy a comfortable life?

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In India, 85% of people who retire currently are completely dependent on their children!

Source: Central Statistical Office, GOI

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But consider this: India has one of the highest savings rate of over 30% p.a. in the world


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•Data available till 2010; ** Base year 1994

Source: World Bank

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

1993-1998 1999-2003 2004-2008 2009-2011

Savings rate globally

US UK Germany China Russia** Brazil India*

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But are savings enough? Inflation eats into savings year after year and leaves little in hand, especially if you have retired and have no steady source of income


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0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1981-1990 1991-2000 2001-2010 2011

% Inflation globally

US UK**** Germany** China** Russia* Brazil India

* Data available from 1993, ** Data available from 1987, *** Data available from 1992, **** Data available from 1991Source: World Bank

Source: ICRA online

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“Humare Jamane mein sab sasta tha!” Do you keep hearing this from your parents?


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Inflation – A reality of Life

Consumption items Price today (Rs.) Price in 1987 (Rs.)

Wheat (per kg) 35 3

Amul butter (500gms) 119 7

Bread 25 2

Petrol (per litre) 75 10

Source: ICRA online

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But here’s the Saving Grace.. India is booming and is considered as one of the fastest growing economies in the world


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-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

YoY Change in GDP - India v/s World

% Change in World GDP % Change in India's GDP

Source: World Bank

Source: ICRA online

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Salaries are growing ……


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Source: ICRA online

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Per Capita Income (%) of GDP - India v/s World

World India

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But is it enough?


10

50

52

54

56

58

60

62

64

66

68

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

Ye

ars

Life Expectancy in India

Source: World Bank

— Expenses too are rising (Inflation)

— Mortality rate is reducing with improving health care

— Avg. age of an Indian is 65 years up from 55 years a few decades back

— This generation will live longer than the previous

— Population growth

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Population growth results in:

0

1000

2000

3000

4000

5000

6000

7000

8000

Population Growth - India v/s World

World in Million India in miilionSource: World Bank

— reducing the share per person of already scarce natural resources

— pushing up prices

— eating into monthly income kept aside for saving/investments

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Which means this generation will require more money in hand post retirement to be able to live in comfort and without leaning on their children!

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Times-are-changing!

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In our parent’s time …..

— Their job meant a lifetime of employment..

— They earned little, spend little and saved a little bit..

— Though owning a House was first priority, most bought it at the age of 50..

— Bajaj Scooter had a waiting period of 13 years..

— A car was a Luxury. Few bought, and that too one car in the lifetime

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Today — Average house buyer’s age is 31

— Most buy a Car before a house

— Most families eat out once a week

— Mobile Phone penetration is amongst the highest in the world

— Most urban and semi urban homes have cable TV

— The Mall culture dominates the urban landscape and consumption patterns

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If Salaries have been increasing, Expenses too are on the rise pushed up by rising prices (inflation)

So what’s the path to a financially stable retirement life?

Saving or Investing?

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Saving v/s Investing

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Saving v/s Investment

Saving:

— Savings are traditionally perceived to be ‘safe’ instruments

— E.g. Post Office Savings, Bank /Corporate FDs and Insurance

— They earn a fixed rate of return

— They are not linked to market prices

— They are NOT inflation adjusted

Investing:

— Investing is traditionally perceived to be into market linked instruments

— E.g. Gold, Property, Shares, Mutual Funds, etc.

— These instruments being linked to market prices, naturally get adjusted to inflation

— They have a better chance of retaining the value of your money

— What’s more they give good returns too!

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Saving v/s Investment - Illustration

A simple Illustration of Returns from Traditional Savings (FDs) v/s Market

Linked Investments (Sensex) viz a viz Inflation over 5, 10, 15, 20 years

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

5 Years 10 Years 15 Years 20 Years

Returns (%) of FDs v/s Sensex v/s Inflation

Fixed Deposit Sensex** Inflation*

% R

etu

rns

Source: ICRA online

Past performance may or may not be sustained in the future

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Saving v/s Investment

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Conclusion:

― As you would have noted the long term potential of market linked investment returns such as

the Sensex, helps keep with inflation

— They Mutual Funds, being market linked (since they invest in equity markets, debt markets,

etc) are therefore a good investment to plan for long term goals such as Retirement

— The converse is that there is risk associated with marked linked investments such as the risk

of investment value declining, liquidity risk, credit risk, and interest rate risk among others

Source: ICRA online


Risk v/s Reward

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Returns v/s Risk – Various Asset Classes

Retu

rn P

ote

ntial

Risk Probability

Bank FD

Index Funds

Real Estate

Foreign Currency

Cash

Gilt Mutual Funds

Gold

Derivatives

Liquid Mutual Funds

Overseas Mutual Funds

Equity Mutual Funds

Sector / Specialty Funds

Exotic Assets (e.g. Art, Wine)

Highly Rated Corporate FD

Income Funds

ETFs

Source: ICRA online


Mutual Funds

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Investing in Mutual Funds

Mutual Funds are one of the best vehicles for people who have neither the

knowledge / expertise nor the time to manage their investments.

Mutual Funds spread the risk of investing among a large number of

investors and therefore are a smart way to participate in the growth of

asset classes such as equity, debt, gold, etc – especially if you live in a

growing economy like India!

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Other key benefits of Mutual Funds

― Cost effective way to invest in various asset classes

— Diversification of investments

— Managed by qualified professional fund mangers with year of experience

— Multiple channels to invest including through Advisors, AMC branch office, R&TA branch office,

Online, through Stock Exchange

— Ease in withdrawing investments

— Tax benefits

— Regulated by Securities Exchange Board of India (SEBI)

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Risks associated with Mutual Funds

― Value of Investment declining

― Liquidity Risk

― Settlement Risk

― Volatility Risk

― Credit Risk

― Interest Rate Risk

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Mutual Fund Returns v/s Inflation

An Illustration: Returns (%) of Equity, Gold, Debt Mutual Funds over 5, 10,

15, 20 yr period

Source: ICRA online. Gold: Rueters, Debt: Crisil 10 Year G-sec Index for 5yr and 10yr, for 15 yr Crisil 1 Yr T-bill was used due

to unavailability of index, Property: NHB Housing Index, Inflation: World Bank


Conclusion: Over the long term (10 years+) Mutual Fund returns seem to beat

inflation

* As of 31st December 2012, ** As of 24 Jan 2013, *** As of Sep 2012

2.95%

19.72%

12.61%

16.17%

5.92%

5.39% 6.43%

12.80%

16.30%

12.14%

8.47%

0%

5%

10%

15%

20%

25%

5 years 10 years 15 years 20 years

Sensex** Debt** Gold** Inflation*

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Property Returns v/s Inflation

An Illustration: Returns (%) of Property over 5 yr period in various Indian cities

Conclusion: Real Estate returns don’t always beat inflation

Source: ICRA online and NHB Housing Index


-3.4%

25.6%

13.8% 14.6%

-0.4%

12.2%

-50%

0%

50%

100%

150%

200%

250%

Hyderabad Chennai Kolkata Mumbai Bengaluru Delhi

5 Year Return Inflation

25%

20%

30%

15%

10%

5%

0%

-5%

% R

etu

rns


Power of Compounding

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Aside from being market linked, money invested in Mutual Funds over long

periods benefits from the ‘Power of Compounding’.

The power of compounding simply known as ‘interest on interest’ was

endorsed by Einstein himself as a powerful tool that grows your money when

invested for long periods of time

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An Illustration of how Power of Compounding works:

Rs.1,000 invested per month @ interest rate of 8% without withdrawal (Total

Rs.60,000) for 5 years grows to Rs.72,945, but when continued to be

invested (Rs.1,000 p.m.) for 20 years (Total Rs.2,40,000) more than doubles

to Rs.5,68,999.


Start Early when Investing

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Starting early in life when investing, helps you have more money in hand when you are ready to retire (than if you had started later in life)


Timing the Market

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So when’s a good time to Invest?

A regular investor’s investing experience can be summarized as under – Buy

high, Sell Low

Ah, price is going up,

lets watch the market

The trend is holding,

I’ll buy at the next

consolidation

Good thing I

bought

and didn’t

wait I will use this

correction

to increase my

investment

Good thing I

sold everything.

The market is

going to the

dumps

Told you so,

markets is in

the dumps

This is just a

temporary jump

That stock price

looks cheap!

I will use this

correction

to increase my

investment

I bought it cheaper

than last time!

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Timing the market

Timing the market is practically impossible even for experts with decades of

experience.

This is what the legendry investor Peter Lynch said “I can't recall ever once

having seen the name of a market timer on Forbes' annual list of the richest

people in the world. If it were truly possible to predict corrections, you'd think

somebody would have made billions by doing it.“

A better investment strategy is ‘Time in the Market’ or the amount of time you stay

invested in the market

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But Investment decisions are never simple ....

― When to Invest?

― What price to invest at?

― How much to invest?

― How long to stay invested?

Therefore Systematic Investment Plan (SIP)

SIP is a disciplined investment plan and helps reduce susceptibility to market fluctuations. It is a powerful

tool that helps you preserve capital and also translates into substantial wealth creation in the long run.


Systematic Investment Plan (SIP)

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Systematic Investing for Retirement

Systematic Investment Plan (SIP)

― SIP is an option provided by Mutual Funds where you invest a fixed amount at regular intervals

― Frequency of investment could be monthly or quarterly.

― The minimum investment amount in most mutual funds is Rs 1,000 per month

― The money may be transferred through ECS with standing instructions

― This disciple helps you plan for your long-term goals along with the short-term ones.

Source: ICRA online

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SIP & Rupee Cost Averaging

Rupee Cost Averaging:

In the case of a SIP, you will be investing irrespective of the market conditions. This ensures

that cost averaging comes into play and allows you to benefit from volatility.

When you buy more units at a lower price (when the market falls) and lesser number of

units at a higher price (when the market goes up), you average out your investment costs.

SIP can be a powerful tool to plan for your Retirement, since it removes the guesswork out

of Investing

Source: ICRA online


SIP v/s Lump-sum Investment

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Systematic Investment Plan v/s Lumpsum in Equity

An illustration of SIP v/s Lumpsum Investment Return (%) over 5 year, 10

year and 15 year period for Equity Diversified Fund and Sensex

11.72

-0.33

8.46

-0.88

16.60

23.60

13.94

19.0619.33 19.22

14.09

11.73

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

SIP Equity Fund Lumpsum Equity Fund SIP Sensex Lumpsum Sensex

5 Yr 10Yr 15 YrSIP: Rs 1000 pmOne time: 5 Yrs: Rs 60,000 (initial), 10 Yrs: Rs 120,000 (initial), 15 Yrs: Rs 180,000 (initial)

Conclusion: SIP investing shows a pattern of steady growth, while Lumpsum investing shows erratic

pattern in Equity investing

Source: ICRA online


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Systematic Investment Plan v/s Lumpsum in Debt

An illustration of SIP v/s Lumpsum Investment Return (%) for Short Term

Income Fund and CRISIL ST Bond Index

8.40 8.237.62 7.517.84

7.21 7.076.39

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

SIP ST Debt funds Lumpsum ST Debt Fund

SIP CRISIL ST Bond Index

Lumpsum CRISIL ST Bond Index

5 Yr 10YrSIP: Rs 1000 pmOne time: 5 Yrs: Rs 60,000 (initial), 10 Yrs: Rs 120,000 (initial)

Conclusion: In Debt investing too SIP investing shows better returns as compared with Lumpsum

investing

Source: ICRA online



Importance of a Balanced Portfolio

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Balance your portfolio

When investing for retirement, you need to spread your investments across asset

classes taking into consideration your age (therefore your risk appetite) and

rebalance your portfolio so that you are able to achieve your goal by the time you

retire

20’s (Aggressive)

30's (Moderately Aggressive)

40's (Moderate)

50's (Moderately

Conservative)

60's (Conservative)

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Balance your portfolio to beat Inflation - SIP

An Illustration of how SIP Returns (%) changes as the Ratio of Equity and

Debt (20:80, 50:50, 80:20) in the portfolio varies over a 5 year and 10 year

horizon.

9.0610.06

11.059.59

12.22

14.85

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Equity20:Debt80 Equity50:Debt50 Equity80:Debt20

SIP - Mixed Investment Portfolio Return %

5-Year 10-Year Inflation-5 Yr Inflation-10 Yr

Assumption: SIP of Rs 1000 pm

Conclusion: Notice how returns reach beyond the Inflation line as you vary the asset allocation proportion

over a 5 year and 10 year period

% R

etu

rns

Source: ICRA online


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Balance your portfolio to beat Inflation - Lumpsum

An Illustration of how LUMPSUM Returns (%) v/s Inflation changes as the Ratio

of Equity and Debt (20:80, 50:50, 80:20) in the portfolio varies over a 5 year and

10 year horizon

6.52

3.95

1.38

10.48

15.40

20.32

0.00

5.00

10.00

15.00

20.00

25.00

Equity20:Debt80 Equity50:Debt50 Equity80:Debt20

Lumpsum - Mixed Investment Portfolio Return %

5-Year 10-Year Inflation-5 Yr Inflation-10 Yr

Assumption: Lumpsum (initial investment): 5 Yrs: Rs 60,000, 10 Yrs: Rs 120,000

Conclusion: Even in a Lumpsum investment scenario, notice how returns reach

beyond the Inflation line as you vary the asset allocation proportion over a 5 year and 10 year period

Source: ICRA online



Importance of a Financial Advisor

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Plan for your financial goals


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Its clear from the previous illustrations investing is not a passive activity. More ever it is not easy for an

individual to plan and regularly monitor and rebalance his/her investment portfolio, especially as this

involves commitment and the requisite skills

A financial advisor can help plan for your goals considering your age, time frame to achieve your goal, your

risk appetite, inflation effect, etc.

Its important however to start early in life so that you have time on your hand.

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Remember: If you fail to plan, you plan to fail in achieving your retirement goals


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Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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How mutual funds can help your investments in pace with inflation