Many
times I had seen that many people & consumer comparing the return of asset
class. Especially when they had put his money in a volatile asset like equity,
there common behaviour with equity was that if I had parked this money in debt
(Fixed Deposit), its gives better return than this volatility. At least I had
protected my portfolio.
Some Conclusion Given Below:
If you are in 30% tax
bracket and put your money in Fixed
Deposit. In this FD you net gainer in one year FD are 10% approx. But after
tax this will be 7% approx. Normal laymen consumer also ignored the inflation
effect towards his money. Where our normal inflation number will 6 to 7%, if
consumers were calculate the inflation effect, his net gain will nothing.
In
similarly put his money in low expense Index Fund, in the horizon of 3 to 5
years term index fund also generate 10% return but with volatility even in some
cases more. But here after one year no taxation and here there 10% gain was 10%
gain. If they were put the inflation effect that also higher then FDs.
If consumer were put their
money in one year FDs in rising interest rate scenario they were gainer always in
certain percentage, but in a falling interest rate scenario every time they
were losing in a certain percentage. Here also volatility exists, but in this case
consumer was not losing his principal. One more risk we will always ignored, Credit Risk.
If someone
were accrued a percentage of extra return from a risk free asset, then he/she
was accrued of some percentage of extra risk also.