Fixed Deposits Beats Stocks? Financial writers need financial literacy first

Recently both Times of India and Economic Times had claimed that fixed deposits trumped Sensex returns over the last 20 years. There are at least five flaws in the argument making the data, while correct, completely irrelevant in practical terms

On 9 April 2012 Times of India (TOI) and Economic Times (ET) (Don't buy and forget if you invest in stocks for the long term) carried an article which claimed that “it is high time investors shed the notion that they can earn handsome returns if they invest in stocks and forget about them for a very long time”. In other words, it was a case against the ‘buy and hold’ principle, which has served many a long-term investors well. The proposed solution: either do market-timing or invest in bank FDs (fixed deposits). This startling claim, which are backed by solid facts, is being discussed everywhere. Financial advisors and mutual funds are scrambling to justify why should one buy and hold stocks for the long-term if it does not even beat safe returns from bank FDs—far from fetching 3-4% more which is what one would expect after having taken the risk of investing in equities.

It is a well-known fact that equities trump bonds or fixed deposits over long periods of time in most countries. However, when we stumbled upon the article which claimed the opposite, we got curious, especially since Moneylife believes in the wealth-creating power of stocks over the long term. We looked closely at the analysis to check whether we missed out on anything.

According to the article, if one had invested in Sensex, in 1992 when it was 4,285, one would have got returns of 7.26% over the last 20 years, till March 2012. On the other hand, it said that if one had invested in one-year fixed deposits, over the same time frame, the returns would have yielded a much higher 8.35% returns. “This means that if you had invested Rs10,000 in the Sensex in 1992, it would have grown to Rs40,308 now. Several debt instruments would have yielded higher returns during this period. If the same money had been invested in a one-year fixed deposit with a commercial bank and rolled over every year, it would have grown to Rs49,722. Since this was for the long term, investors could have opted for five-year FDs that offered higher rates. This corpus would have been bigger at Rs70,854.” Based on selective facts, the argument is flawed for at least five reasons.

1. Arbitrary Dates: Any point-to-point comparison is completely arbitrary. This study coincidentally chose 1992 as the starting date. If one had entered the market a year earlier or a year later, the returns would have trumped fixed deposits. For instance, if you had entered the Indian market in 1993 instead of 1992, when Sensex was 2,280, you would have got 11.29% returns. Even a year earlier, in 1991, would have yielded a much higher returns of 13.73%. This is a huge difference from the 7.26% return noted earlier. Additionally, both are higher than either one-year or five-year fixed deposit schemes. Therefore, it is not only a matter of timing, which is fairly obvious, but also a question of conveniently choosing the time period when fixed deposits trump equities. It is very easy to look at the rear-view mirror and make pronouncements. This also applies to mutual fund performance which is why we choose rolling returns, as the basis of our analysis.

2. Tax: The biggest flaw is that there is no mention of tax. These returns are pre-tax. When the government takes away 30% of your interest income above a certain level as tax and allows you to earn long-term capital gains tax-free, it is foolish to consider pre-tax returns for comparison. Take into account taxes, and Sensex easily trumped post-tax FD returns. Instead of the 8.35% (one-year FD) returns mentioned earlier in the article, the return was found to be 5.86%, over the 20-year period. Similarly, the five-year FD scheme returned slightly higher at 6.21%. This is well below the 7.26% in case of equities even starting at 1992. We have assumed uniform taxation of 35% because while it is 35% now it was above 40% in the early 1990s.

3. Dividends: Like taxes, the ET/TOI article ignores another element—dividends. Over the long period of time, small dividends can make a huge difference. In our case, we found out that by just reinvesting dividends, every year, the annualised returns turned out to be 8.29%, a good 1.53 percentage points higher. This is a huge difference considering the power of compounding over long periods of time and erodes the edge of FDs fully.

4. Lumpsum Vs SIP: The study assumes that all the investment was made on one particular day in 1992. Most readers of Times and ET earn regularly, save regularly and should invest regularly. They don’t make lumpsum investment or should not. Any financial literate person knows the importance of regular investing, or Systematic Investment Plan (SIP), which can work better than lumpsum investment usually. Our study showed that if one had invested just Rs500 (or any amount for that matter), every month, for the period 1992-2012, this strategy would have netted you a cool 11.60% return, again higher than FD returns.

5. Index Buying: Finally, who bought Sensex in 1992 or buys even now? You could invest in units of Unit Trust of India in 1992 and most people would have advised an average investor to invest in blue chips like ITC and Hindustan Lever (now Hindustan Unilever). These stocks have done far better than Sensex. Mutual funds were not in the vogue then. Index investing wasn’t even present in India then. There are very few people who invest in index funds even now. The best performing mutual funds have done 5-6% better than Sensex (and bank FDs on average).

If you are interested in personal finance and financial literacy, you would have to do your own homework and not trust the findings of either distributors, financial companies or media, packaged in dramatic headlines, because financial journalists themselves can be lacking in financial literacy.

Ashwin Sheorey
1 decade ago
I agree to the above. The article also does not consider the bonus shares issued.

Preeti Deshpande
1 decade ago
Hilarious experience

I am not a regular moneylife reader and came here only because one of my friends sent this link saying “you may like this hilarious piece”. After reading the article and also the comments, I fully agree with him.

The article heading says “Financial writers need financial literacy” and the supposed to be financially literate author – Mr Debashis Basu – doesn’t even know the basic mathematical calculations. He is writing that “we found out that by just reinvesting dividends, every year, the annualised returns turned out to be 8.29%, a good 1.53 percentage points higher”. Who on earth will be able to teach him that the difference between 7.26% and 8.29% is only 1.03 percentage points and not 1.53 percentage points.

Please don’t abuse me for pointing out this blunder. I am saying this upfront because I have noticed that you are calling people “stupid”, “moron”, etc for pointing out other mistakes.
Moneylife Digital Team
Replied to Preeti Deshpande comment 1 decade ago
Thanks for pointing out the BIG error :)
Our annualised return figure was wrong. In your poor effort at sarcasm, you simple assumed that the dividend reinvested figure is wrong.
Except that the return figure now, after dividend reinvested is 8.79%. For clearer understanding of the mathematical wizard \"Ms Deshpande\", it is now 7.26%+1.53%=8.79%.
But we agree it is hilarious. Your effort, that is. Since it strengthens our argument even more. :) Thanks
Replied to Preeti Deshpande comment 1 decade ago
Wow, you took all this trouble to point out this one great monumental flaw! Congrats!
Replied to Rajiv comment 1 decade ago
Truly hilarious. But, of course, I hope arithmetical genius and financially illiterate Ms Deshpande is not laughing now
Anil Agashe
1 decade ago
Judging from the comments of some people it only reinforces the need of financial literacy. Anyway it is good to know the level of stupidity that is prevalent in our midst. If someone thinks investing in FDs is best then best luck to them why should we complain? ET and TOI is for such people. As long as we have people lie Mr Mehul we still have hope. I am quite certain that people who have written against stocks are ones who invested at wrong time in fancy scrips and have made heavy loses and so are saying FDs are better! If you bought in 2007 at stupidly high prices and then suffered loses then you deserve those loses and so stick with FDs. Markets are not for idiots it requires intelligence to make money in markets or anywhere. FDs and PPF are for people who do not want to use brains and therefore give moderate returns.
It is a well known fact that people who are not open to test their perspectives are the ones who are fanatics. In way all these people who are in love with FDs are like communists who deny all things that are against their out dated ideology.
1 decade ago
Please send this article and all comments below to ET. Give them some food for thought. Good work Money Life. You have a customer here, will subscribe to your magazines too. Good luck and keep writing unbiased articles on personal finance.

(PS: I'm a financial advisor & will quote this to my clients if need be:))
P Vijayan Nair
1 decade ago
Thank you for this enlightening article. The Times of India perhaps forgot to mention "Advertorial".
1 decade ago
I think moneylife should not try to be PRO equity culture and trying to push investors for equity investing the way market behaves ie like speculation(not like solid fundamentals),
the writer of the ET has taken the example of india for 20 yrs-but if we exclude last 5 yrs and take calculation for 15 yrs period from 1982 to 1997-then just make a guess what could be outcome of return generated from equities?
i guess it could bbe hardly2-3% annually,
what about equity returns in Japan Nikkei since last 30 yrs(fairly long term period)
and just see it is in negative return.Nikkei was around 40000 3.5 decades back and today it is hovering around 10000-
does this SOLID example justifies investing in Equities any more?
i am sure moneylife took a biased look in contradicting the article.
Replied to Roopsingh comment 1 decade ago
this is once again foolish, selective analysis. have you even the read the article or even understood it? Shows how tough it is to make people financially literate

1 decade ago
This is the stupidest article I have ever seen on Moneylife and seems to have done to get some cheap publicity. Anyway, let us concentrate on the flaws in your arguments:
1. Nothing arbitrary about the date selection – I think the ET has selected the 1992 peak to bust the common myth that equity will “always generate better return in long term”. Don’t want to argue further if you think 20 years is not long term enough 
2. Now about the taxation angle – Equity is supposed to generate better return because it’s risky and not because its tax efficient. If you consider tax and compare with similar products, PFF would have generated much better return in the last 20 years – I can’t remember even a single year when the PPF rate was at 7.3%
3. Your argument about dividend is also flawed. While the Sensex calculations ignore about dividends, please note that it also assume that there is no transaction costs – ie you can buy / sell the stocks in Sensex without any brokerage at the time of initial buying and also whenever there is a change in index constituent. So the so called dividend income would have been negated by these transaction costs. And even after assuming zero transaction cost and adding dividends, your calculated return of 8.29% is still well below the return PPF would have been generated during the last 20 years.
Nehal Batheja
Replied to Raju comment 1 decade ago
Dear Raju/Ramesh,

I am 90 years old, have lived in 5 different continents, and I have never come across a more stupid man than YOU!

1) Equity investments have to be staggered; not invested in only in 1992.

2) Equity makes 30% better returns than FDs due to TAX, not just risk. PPF invetmets have a limit and in PPF you earn only 8.5% at best.

3) If you guy and hold you don't incur much transaction cost. Transaction cost is significant when you trade. The dividends earned DO add to earning. These dividends are tax free unlike interest from your FDs.


Nehal V Batheja
Moneylife Digital Team
Replied to Nehal Batheja comment 1 decade ago
Thank you Mr Batheja for taking the trouble to write. We normally ignore comments that are deliberately spiteful and also foolish. There are all kinds of morons. Otherwise who would read our article and vomit out this rubbish
Replied to Moneylife Digital Team comment 1 decade ago
Moneylife has gone to nuts and shows their "yellow journalism culture" with this post. Else, how can they praise Nehal Batheja's post that states "Equity makes 30% better returns". Would be nice to see which "long term period" equity has made that. Or is the praise for calling the earlier poster "stupid"? If this is your culture, I have to stop reading your magazine and stop checking your site for ever.
1 decade ago
Reasoned, factual and watchful of investor interests - the article stands for the best attributes of Moneylife.

Even the Times group, with all its commercial biases, cannot justify deliberately picking up '92 scam driven peak to create such a misleading article. And then provide the wrong conslusion by ignoring tax.
Simple facts - the data qouta by ET/TOI proves that:

1. Over the long-term you do not lose money in stocks even if you invest at the top of a boom!
2. Pay attention to post-tax returns = the money you actually take home. Again stocks beat everything else.

There is no better investment than a well-run, competitive business. And stocks are the best way for most investors to participate. Unless you have the money to buy the business and the smarts to run it yourself!
Moneylife Digital Team
Replied to DG comment 1 decade ago

There is no better investment than a well-run, competitive business. And stocks are the best way for most investors to participate. Unless you have the money to buy the business and the smarts to run it yourself!

Well, said. This is sooooooooooo hard for people to understand. They get tied down in all kinds of selective data analysis. Also, there is something in us which seeks to negate business success. A Satyam will be shown as the example of why not to buy stocks, a selective 20 year data will be massaged to show equity is worse than FD
Replied to Moneylife Digital Team comment 1 decade ago
Moneylife has gone to nuts and shows their "yellow journalism culture" with this post. Else, how can they praise Nehal Batheja's post that states "Equity makes 30% better returns". Would be nice to see which "long term period" equity has made that. Or is the praise for calling the earlier poster "stupid"? If this is your culture, I have to stop reading your magazine and stop checking your site for ever.
Replied to Sudhin comment 1 decade ago
If it is yellow journalism culture and Moneylife has gone nuts, why are you here?
1 decade ago
Thanks for your detailed analysis on the issue. Moneylife has an extensive reach and would help many people.

Normally though I read extensively, I try my best to differentiate information from noise; and most of the things in financial media are just noise.

As a newspaper ad says; sense not sensation which matters.

Many advisors themselves got confused with this analysis. That is the reason why I wrote a piece in my blog comparing last 33 years of performance between FDs, Gold, Silver and Sensex, adjusting for inflation. Otherwise I completely ignore most of the things which appear in financial media. As you’ve rightly pointed out, an arbitrary point to point comparison can be misleading. Even in that arbitrary comparison, if dividend yield is accounted for it still proves the newspaper’s comparison wrong.

I’ve not come across any good investor who takes decisions based on financial media.

As investors, if we ask simple and basic questions, it covers most of the issues. We need not worry about few complex issues which may occasionally fall outside the simple and basic analysis.

Also it is wrong for someone to invest lump sum in an Index at such high multiples. That education could have been done by the newspaper along with the article. As you’ve rightly pointed out, investing through SIP, dividend yield and taxation was completely ignored. Your SIP analysis of 11.6% is a very useful pointer.

Peter Drucker said about information overload beautifully:

“It’s bred in the bones of human race that the more information, the better- it’s quantity that counts. But when information is no longer scarce, believe me, you very soon learn that less is more, and that more is most definitely less. And you learn that quality counts and information is something that has to be selected.”

There are few things I first learned only at Moneylife. How the highest NAV guaranteed scheme works and how exchange rate movements affect the gold price and creates impression that gold price never falls.

Please keep up the good work.

As you’ve rightly pointed out, investors need to learn to ask right questions and do the home work instead of blindly relying on media or even what advisors like us tells.
Miles to go.. but it is definitelty possible.

People like me hardly reach few hundred people but Moneylife has the ability to reach far wider investor population and hats off to your work on empowering people.
1 decade ago
Public memory is short. The same ET:

Long-term investors having a bull ride

Moneylife Digital Team
1 decade ago
The point of the ET/TOI article was to tell you a lesson from the past and what not to do in future. But to do that, we cannot extrapolate the past. We have to calculate everything in practical terms today - taxes, dividends, SIP...and also be alive in the future whether any of the conditions have changed. If any of the conditions that made equity attractive change, returns will change. Like if there is long-term capital gains of 30%, bank FDs will be attractive. Also, if equity prices shoot up for some reason and PE becomes 80 (as was in Japan in 1989), equity would be a poor investment for the next 20 years. Sensible investment research is more than back-of-the-envelope calculations
Replied to Moneylife Digital Team comment 1 decade ago
Finally you decide to accept that the ET article was right - ie if you invest at extended valuations, equity will generate poor return even after holding for 20 years. Congrats for the courage.
Replied to Ramesh comment 1 decade ago
It is not about courage. It is about honest intellectual curiosity and seek the real facts. For people like you everything is black and white, win or lose...I am sure all your money is in FD - or may under the mattress
Madhur Kotharay
1 decade ago
Debashis, you are spot on. It was just a cheap article in ET.

April 1992 was when Sucheta was about to expose Harshad Mehta fraud and the P/E was 45. Currently, P/E is 15. How can you calculate gains from peak bull market to strong bear market?

If you adjust for sentiment, i.e. either assume P/E 15 on both dates (today and 20 years ago) or check the EPS gains (and not the absolute value of Sensex), the Sensex EPS gains would have been 13.35% CAGR instead of 7.3% CAGR (Sensex gains). Add to that dividend yield of 1% reinvested and you get 14.5% returns CAGR.

Sad that they are publishing an article like this when people should actually be investing. One Mr Rajiv Ahuja in his comments on your article below has said that many of his friends find FDs give better returns than stocks.

That is because people like Mr Ahuja don't invest when things are bad such as now. They wake up to invest when there is irrational exuberance in the market and Sensex gains is the talk of the housewife kitty parties.

I have been trying my best to get near and dear non-investor friends to invest in this market and most aren't listening. THEY are telling ME why we should NOT be investing right now as the situation is so bad!!! Tragically, they have been right so far. :-(

I am 90% invested and waiting on the sidelines to invest the rest in the 3 months on a severe fall. Hope Mr Ahuja does so too. He will have a different story to tell after 3 years (probably, not after 3 months).

I wrote to ET the same night complaining about it and gave detailed explanation. They defended that they were doing the right thing. I did not argue further.
Ayush Jain
1 decade ago
The above article doesn't mention 80L when it talks about tax. It also talks about SIP - how many investors were aware of this concept in 1992 ? Like you mentioned there were hardly any MFs, so even for those who were aware, it would have been difficult to execute.

The article mentions about investing Rs 500/month, and then later says there was no index buying in 1992. So in what was this Rs 500/month invested, which got 11.60% returns ? The calculation needs to be explained.

The ET article may not have been perfect (tax/dividend angles should have been mentioned), but it is still an eye-opener. It does show that one cannot simply assume that equities will always beat FDs. Even taking into account the tax & dividend advantages, the outperformance is maybe 2% (CAGR). Sure, it's point-to-point, but then 20 years is a long time period !

Finally, when talking about equity, we should always remember the experience in Japan - 20-25 years later, the 'Nikkei 225' index is still at 25% of it's value. Please do a calculation based on this experience and show if a SIP strategy over last 30 years would have worked in Japan.
Replied to Ayush Jain comment 1 decade ago

Investing in equities will beat all the asset classes. Recently there was an analysis which was also published in Moneylife which said that since 18 hundred something bonds were able to beat stocks only 2 times. Out of one and a half decade bonds could beat stocks only twice? Then definitely equity must have an edge over bonds.

Also regarding Japan I would suggest you to do a google search on "japan lost decade myth".
Ayush Jain
Replied to pravsemilo comment 1 decade ago
Dear Pravsemilo,

My point was on equity market returns in Japan, not the state of their economy. It's a fact that Nikkei is at ~25% of where it was 20 years ago. So I will repeat - let's see some data on SIP returns for a 30-yr period.

Secondly, this 'in the long term, equities will beat all asset classes' is a dangerous myth. The moneylife team have responded above and highlighted a couple of scenarios.
Rajiv Ahuja
1 decade ago
Not only me but a lot of people have come to a conclusion that F.D give better returns than investing into stocks or mutual funds.
Replied to Rajiv Ahuja comment 1 decade ago
On many issues, a lot of people can have wrong "conclusion" for a very long time.
1 decade ago
I did away with ET times years ago - it's fiRst purpose seems to be to create media frenzy & then popularize products and create a fake hype.
Business Standard and a coupla other weekly publications along with your website help keep facts FACTUAL!!
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