Try to maximise the post-tax returns. For instance, a 9% return on Bank FDs may look good, now. But if you were in the highest tax bracket, your returns would be only 6-6.3%. Instead, you could look at Fixed Maturity Plans (FMPs), which will fetch 8-8.5% post-tax returns.
Equity investments
Returns from equity (shares, equity mutual funds, Equity Unit Linked Insurance Policies) are dependent on the performance of the companies.
1. Work out how inflation will affect the company's performance, ie, does it suffer from the rising cost of inputs? This analysis will help you understand the impact of inflation on the company and the share prices.
2. Inflation will slow down the Gross Domestic Product (GDP) growth rate, which was above 9% in the last few years. Lower growth rate means lower profitability and hence lower share prices.
3. If there is less demand for shares, it could dampen the prices. This will, in turn, shift the focus towards debt instruments with higher risk-free returns.
Should you exit from equity?
No. Instead, you need to have a long-term view on equity. You can draw comfort from the fact that even with 4-7% GDP growth rates in the last 15 to 20 years, the markets averaged a return of 15-16% per annum. It's reasonable to expect 15-20% returns over the long-term. The key is patience. So, pull up your socks and face the beast with gusto!
