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Personal Finance for Teens

The Way Out

So, the next logical step here is to hunt for alternatives that provide some leeway in terms of returns.  Although not exactly an appropriate gauge, historical returns of different asset classes can provide some inferences about the kind of future returns. 

 

1) Gold- The yellow metal is a classic favorite amongst Indians. It is considered as a great inflation hedge and has been known to outperform other asset classes during periods of economic downturn. 

 

In the past twenty years, Gold has given absolute returns of around 1000% and annual compounded returns of approximately 12.70%. Attention must be paid to the fact that the returns given by gold are double that of traditional fixed deposits.

 

Investing in gold requires one to be cautioned about:

 

  • Making charges- Since we are buying gold purely for investment purposes, stick to bullion bars instead of coins, jewelry, and other artifacts. You will end up paying hefty making charges for the same which will naturally reduce your overall return.
  • Selling charges- Buying & selling physical gold can be an expensive affair. It is best to stick to Gold ETFs for investing since it is safe & cost-effective. There is no minimum investment amount as well.
  • No passive income -  Unlike stocks that pay dividends, gold does not provide any interest income. 

 

Gold is a strategic defensive allocation best suited for conservative investors with a low-risk appetite. Investors must consider the Sovereign Gold Bonds (SGBs) issued by the Government of India if they intend to invest in gold for the long term (greater than eight years in this case) else Gold ETFs are the best available option. SGBs provide fixed interest income @2.5% p.a. In addition to appreciation benefits that make it a lucrative option.

 

We recommend going through this module to get a better idea about gold as an investment option. 

 

Our opinion - Allocate 10-15% of your total funds to gold as a safety hedge.

 

2) Equity - is perhaps the only legitimate asset class(not considering cryptocurrencies) with the potential to consistently deliver returns superior to the inflation rate. Let us look at the past performance of the headline indices Sensex & Nifty 50 have performed:

 

The Sensex and the Nifty 50 have handsomely rewarded investors with returns of roughly 14% CAGR in the last 20 years, greater than any other asset class.

 

The thumb rule for equity investing is: 100-Age = Equity Percentage Allocation 

For instance, if you are aged 20, you must invest 80% of your funds into equity and the remaining 20% in defensive bets. As simple as that.

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