Is Your 12% Investment Return a Lie? Financial Expert Reveals Shocking Truth About Real Earnings!

Author

Aditi Singh | Whalesbook News Team

Detailed Coverage:

Financial expert Ritesh Sabharwal has issued a reality check for investors who believe their equity portfolios consistently earn around 12% annually. He clarifies that this figure is misleading because it fails to account for crucial factors like inflation and taxes. Using the real return formula, Sabharwal demonstrates that a stated 12% return, when adjusted for a 5% inflation rate, falls to 6.7%. Further applying a 12.5% long-term capital gains tax reduces the net return to just 5.8%.

Sabharwal warns that investors keeping substantial amounts in savings accounts, fixed deposits, or debt funds are likely experiencing negative real returns, meaning the purchasing power of their money is eroding over time. He illustrated this with a Rs 1 crore portfolio, where a 12% paper gain of Rs 12 lakh shrinks to only Rs 5.8 lakh after inflation and taxes, resulting in a loss of Rs 6.2 lakh due to these factors alone.

He strongly advocates for meaningful equity exposure as essential for long-term wealth building, advising investors to look beyond short-term fluctuations and adopt a steady approach. For those new to equities, Sabharwal recommends starting with a simple index fund. The key takeaway is to focus on real returns, stay invested, and rebalance portfolios strategically to combat inflation.

Impact: This news directly impacts Indian investors by correcting a widespread misconception about investment returns. It encourages a more realistic approach to financial planning, potentially leading individuals to adjust their investment strategies towards assets that can outpace inflation and taxes, thereby safeguarding long-term wealth. A shift in investor behavior could influence fund flows within different asset classes in the Indian market.

Impact Rating: 7/10

Difficult Terms:

Real Return: The actual profit an investor makes after accounting for inflation. It shows the true increase in purchasing power.

Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. It erodes the value of money over time.

Equity Exposure: The amount of money invested in stocks or stock-based funds, representing ownership in companies.

Long-term Capital Gains Tax: A tax levied on the profit made from selling an asset (like stocks) that has been held for a specified period (often over one year), with specific tax rates applied.