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"Bhaiya, tell me a scheme in which money does not sink and you get guaranteed returns." This question reflects the thinking of crores of small and middle-class investors of India. In our society, we are taught from childhood to keep our hard-earned money safe. Due to this thinking, most people consider Fixed Deposit (FD), Public Provident Fund (PPF), Kisan Vikas Patra (KVP), or insurance schemes as the only means of investment. After all, these have the guarantee of the government or the bank.

There is nothing wrong with this 'no love for risk' thinking. Security should come first. But have you ever thought that the money which you consider completely safe is losing its value year after year? You are making a mistake that will never let your dream of becoming rich come true.

The illusion of guarantee and the termites of inflation

Suppose you deposited 1 lakh rupees in an FD for one year at an annual interest rate of 7%. After one year, the bank will give you 1,07,000 rupees. You are seeing a direct profit of Rs 7,000. You are happy that your money has increased.

But now let's bring the termite of inflation into this story. Inflation means the rate of increase in the price of things. Suppose the inflation rate was 6% that year.

This means that the thing which was Rs 100 last year has now become Rs 106. So the purchasing power of your Rs 1 lakh should also be Rs 1,06,000 now, just to buy the same amount of goods as before.

So what is your real return, i.e., real profit?

Real return = Interest rate - Inflation rate

Real return = 7% - 6% = 1%

Your profit of Rs 7,000 is equal to just Rs 1,000. But the story does not end here. Now you will have to pay tax on this profit of Rs 7,000 as per your income tax slab. Suppose you fall in the 20% tax bracket.

Now let's calculate the real return from this income-

Rate of return after tax: 5.6% (Rs 5,600 is 5.6% of 1 lakh)

Inflation rate: 6%

Real profit = 5.6% - 6% = -0.4%

Are you shocked? Yes, instead of increasing your money, it decreased by 0.4%. Your purchasing power of Rs 1 lakh became just Rs 99,600 after one year.

So what to do? 'Love risks a little'

This does not mean that you break all your FDs tomorrow and invest in the stock market. The solution to this is a balanced approach and asset allocation. You have to divide your investments into two parts:

Guaranteed Return

These give stability to your portfolio. FDs and PPFs are great for short-term goals like an emergency fund, children's school fees. These are the foundation of your money.

Growth Assets

These are investments that have a little risk, but also have the potential to beat inflation and give tremendous returns. These are what build your wealth in the long run.

Mutual Funds (SIP)

This is the safest and easiest way to step into growth investments. You can start with a small amount (like ₹ 1000) every month. In the long run, SIP can give an average return of 12% to 15% or even more, which easily beats both inflation and tax.

Stock Market (Direct Equity)
If you have a good understanding of the market, then you can invest directly in stocks.

Real estate and gold

These are also good options for long-term growth. You can include this in your portfolio as well.