It has been consistently proven with historical returns data that equity as an asset class has delivered the best returns compared to other assets such as debt, real estate or gold. Yet, many investors still avoid investing in equities for fear of volatility and erosion of capital in case of steep market fall.
For such risk averse investors we present a simple yet effective solution which will keep their capital safe, while also enable real wealth creation through investing in equities. We have in our previous blog explained how smart use of tax laws can help you enhance yield of your safe capital. You can read the blog here .
To recap, we present a comparative table below between the post-tax yields of a traditional bank fixed deposit vs post-tax yield of a liquid fund:
| Fixed Deposit | Liquid Fund | |
| Principal (Rs) | 1,000,000 | 1,000,000 |
| Pre-tax annualised yield | 7.00% | 7.00% |
| Interest Amount (Rs) | 70,000 | 70,000 |
| Tax on interest (@30%)* | 21,000 | – |
| Capital Gain tax (@30%)* | – | 1,374 |
| Post Tax yield | 49,000 | 68,626 |
| Post Tax Yield % | 4.90% | 6.86% |
The crux of our solution is to reinvest this yield in equity mutual funds/stocks for long term wealth creation. This way a risk averse investor is not risking his base capital, because it is invested in safe assets such as liquid funds, while he is also generating long term wealth through investing in equities. Further this approach can continue in infinity as long as the core capital remains invested in liquid funds. What is even better is this reinvestment of yield can be done online at click of a button, at investor’s convenience and preference. To summarize:
- Keep core capital safe
- Reinvest yield on core capital into equity mutual funds
- Perpetual and automatic wealth creation through reinvestment of yield
- Easy to execute and monitor
Just how powerful this simple trick is can be illustrated by following table showing potential corpus created over a period of 20 years for an initial investment of Rs 10 lakhs in liquid funds:
| With reinvestment (In Rs) | Without Reinvestment (In Rs) | |
| Initial investment | 1,000,000 | 1,000,000 |
| Annual post-tax yield % (from above table) | 6.86% | 6.86% |
| Annual yield invested in equity mutual funds | 68,626 | – |
| Annualised equity returns % | 15.00% | – |
| Accumulated value of reinvestments after 20 years | 7,030,000 | – |
| Total value | 8,030,000 | 3,800,000 |
Thus by simply reinvesting annual yield on your core, safe capital your terminal value after 20 years is more than twice the value without reinvestment. And all this without risking your hard earned money.
To know more about liquid funds, which funds to invest in and how to reinvest accumulated yields, please get in touch with us. We offer a Virtual HelpDesk for our clients, where you can request a free video consultation with us to answer your financial and investing queries