Inflation is the biggest destroyer of purchasing power. Over FY79-14 CPI inflation has been 8.4%, eroding purchasing power of Rupee by 94%.
Investing may be defined as the process of gaining higher purchasing power over time (i.e. net of inflation and taxes). In fixed income investing, the average annual post-tax return works out to about 7%. If the same is reinvested, over 20 years, the security would be worth about 4x its original value. Hypothetically, if inflation also turns out to be 7%, then even after 20 years, there is zero increase in purchasing power
In contrast, equities in India have delivered average annual return of 17% (S & P Sensex / Nifty 50)(Source: www.bseindia.com and www.nseindia.com). At this rate, over 20 years, the original holding will rise to 23x. Adjusted for inflation, purchasing power would rise almost 6x (23 ÷ 4).
Further, we believe that by disciplined application of a sound investment philosophy, it is possible to outperform the market. If the average annual return works out to 25%, over 20 years, the original investment will grow 87x i.e. a massive 22x increase in purchasing power (87 ÷ 4).
Finally, as the graph below clearly shows, over the last 35 years, equity has outperformed fixed income and gold by a huge margin