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Tuesday, May 19, 2009

Investment Tips Facing the Inflation and Tax

Most people put money in a safe way only. Why do they put 100% funds to invest in products that are 'safe', such as savings accounts or deposits in the bank? The answer is because people like this fear of losing money.

If you are still young (say, are still under age 40), it is actually very ironic and very be pitied. Because what they think the investments that are 'safe', such as savings accounts or deposits, does not actually even 'safe'. How possible? If you have the money US$ 100K to put in deposits, it may be at this point you will get an interest rate of 12% per year. Correct? Thus, the amount of interest you get on the end of the year are: US$ 100K x 12% = US$ 12K

However, if the tax cut deposit interest rates of 15%, the interest rate you get is US$ 10,200 at the end of the year. So actually, the interest rate you get after tax is 10.2% per year.

Now the problem, whether the amount of interest US$ 10,200 can continue to purchase goods and services which cost US$ 10,200 per year? The answer is not clear. Why? What, in the last 12 years the average price increase of goods and services going on in India is 13.35% per year. The increase in goods and services in aggregate always shown through the calculation of inflation that the government announced each month. Below is a table full:

1988 = 5.47%
1989 = 5.97%
1990 = 9.53%
1991 = 9.52%
1992 = 4.94%
1993 = 9.77%
1994 = 9.24%
1995 = 8.64%
1996 = 6.47%
1997 = 11.06%
1998 = 77.63%
1999 = 2.01%

Average = 13.35%

With this assumption the fact that real interest rate you get is: the interest rate after tax (10.2%), reduced inflation (13.35%) with the minus 3.15%.

That is, if the current money you invest US$ 100K, and then deposit that gives 12% interest per year before tax, after 10 years your real balance at the end of the year to 10 is US$ 72,609 In other words, you shrink the money of 3.15% per year.

This is why many people fail in finance. They were too focused on security issues rather than try to take the investment risk is greater. Most useful for risk benefit is greater for 'defeat' the level of inflation. With a focus on investments that are 'safe-safe' course, the results obtained by the real investment are not large. Even tend to minus as in the example above.

If you want to accumulate wealth, then what you should do is to take the risk is greater so that it can provide potential profit is greater. So you still get the benefits that can be spelled tolerable, even though taxes have been cut and inflation.
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