For most Indian investors, traditional savings instruments like fixed deposits (FDs) fail to keep pace with inflation. When adjusted for a 30% tax on interest, State Bank of India’s one-year FD rates have underperformed consumer inflation in 10 of the past 13 years. Over this period, the cumulative return fell short of inflation by a full percentage point. This means that an investor who places funds in an FD at the start of the year often ends up poorer in real terms by year’s end.
A Closer Look at Key Asset Classes
The primary saving avenues for Indian households—real estate, gold, and FDs—haven’t fared much better. Data from PropEquity on property prices across India’s top seven cities shows that real estate outpaced inflation in only four of the last 13 years, even after accounting for long-term capital gains tax. Cumulatively, it underperformed inflation, doing worse than FDs.
Gold has had a comparatively better track record, surpassing inflation in nine of the past 13 years. However, its performance is marked by significant price volatility and occasional outright losses. If an investor were to equally divide their savings among FDs, real estate, and gold, they would have failed to beat inflation in six of those 13 years and ended up lagging inflation on a cumulative basis.
The takeaway is clear: to preserve purchasing power over the long term, incorporating equities into one’s portfolio is essential.
The Role of Equities in Beating Inflation
A balanced portfolio including equities significantly improves returns. For example, allocating 25% of a portfolio to equities and the remainder equally to FDs, real estate, and gold would have outperformed inflation in 11 of the past 13 years, with an annualized return 1.8% above inflation. The only exceptions were 2013 and 2015, years marked by substantial declines in gold prices.
Household Investment Patterns
Despite this evidence, Indian households remain under-invested in equities. According to estimates from the Reserve Bank of India (RBI), World Gold Council, and Jefferies India, only about 10% of household wealth is allocated to equities. By contrast, the majority is tied up in real estate (55.1%) and gold (16.4%), with the remainder in fixed-income instruments like FDs and bonds.
Even within financial assets, nearly 40% is allocated to pension and insurance products, which are heavily skewed toward fixed-income investments. These often suffer from the same inability to beat inflation as traditional FDs.
Why Households Favor Suboptimal Allocations
Several factors explain this behavior. Until recently, awareness of financial markets and access to diversified investment options were limited. The digital public infrastructure and fintech boom have improved this scenario, but the shift toward equities has been slow. Additionally, mental accounting plays a role—assets like property and gold, often inherited or considered family heirlooms, aren’t always viewed as part of an investment portfolio.
A Way Forward
To protect and grow wealth, households need to reevaluate their asset allocations. Drawing up a comprehensive inventory of all assets—discretionary, forced, and ancestral—is a critical first step. A well-balanced portfolio that incorporates equities can help ensure better returns over time and safeguard against the eroding effects of inflation.
The views expressed are personal.
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