Vijai Mantri, MD & CEO, Pramerica Mutual Fund uses mythology to explain the demon of inflation and how you could slay it with equities
In Hindu mythology, Bhasmasura was a demon who, after praying to Lord Shiva received a boon that anyone whose head he touched with his hand should immediately turn into ashes (bhasma). Shiva granted this request, but Bhasmasura, the ungrateful demon that he was, attempted to touch the head of Shiva with his hand. Shiva fled and somehow managed to reach Lord Vishnu for help.
Lord Vishnu took up the disguise of Mohini, a beautiful dancer, and appeared in front of Bhasmasura. Mohini was so exceedingly beautiful that Bhasmasura immediately fell in love with her. Bhasmasura asked Mohini to marry him. She told him that she was very fond of dancing, and would marry him only if he could match her moves identically. Bhasmasura agreed and they started dancing. Bhasmasura matched the disguised Vishnu's move for move. Smartly then, Mohini struck a pose where her hand was placed on top of her own head. As Bhasmasura imitated her, he was tricked into touching his own head, and immediately turned into ashes.
How is mythological story connected to a common man like you & me? Think about Bhasmasura as the equally deadly, money-burning inflation. Like Shiva who granted the boon to Bhasmasura, who gives inflation the power to rise? You and me! Inflation is the result of more money chasing fewer goods, leading to a demand & supply disparity. All of us, with our new age salaries are spending more than ever, leading to rise in prices and thus a rise in inflation.
This inflation eats away at our purchasing power. So, all that you can buy for Rs.10,000 today will cost more tomorrow. Inflation eats away a major part of the returns that your investment generates. So, if your FD gives a return of 8% and the rate of inflation is 8%, you are actually earning nothing on your investment! Then, how can we defeat this Bhasmasura named Inflation? Shiva turned to Vishnu for help, who do we turn to for safety? Vishnu in our case is - equities/shares of the same companies that make these goods that we are buying. Let us see how.
Say, you love the soaps manufactured by a particular company and so does everyone else you know. The more people buy that soap, the higher the profits for that company. These profits the company shares with its shareholders in the form of dividend. By buying even a single share of that company, you can take home a part of this profit.
Look at a bank, if it is offering good rates for lending and deposits and more and more people are flocking to it, chances are that it might generate handsome profits. Buying shares of this bank will ensure a share in profits for you by means of dividend.
Inflation currently stands at around 8% (March 2011 inflation forecast as per RBI is 8%), whereas equities have typically given 18-20% returns in the long term. Even if you take inflation at 6%, 20 years from now something that costs Rs.10,000 today will cost Rs.32,071! If you invest the same Rs.10,000 in a fixed deposit at 8%, 20 years from now it will be Rs.46,610! Wait, before you run to the bank, just hold on for a minute while we deduct taxes from those returns. If you fall in the highest tax bracket of 30%, the figure of Rs.46,610 shrinks to Rs.29,736 - less than what inflation did to prices! So while you thought you will beat inflation, in reality, you lost your capital!
Now, if you choose to invest this Rs.10,000 in equities today, 20 years from now that money could turn to Rs.1.63 lakhs, even at a conservative 15% return! Very few investment options have the capacity to generate such inflation-crushing returns. And this is the Mohini avatar that will help you kill the Bhasmasura of Inflation.