{"id":4203,"date":"2024-10-20T14:07:35","date_gmt":"2024-10-20T14:07:35","guid":{"rendered":"https:\/\/1finance.co.in\/magazine\/?post_type=blog&#038;p=4203"},"modified":"2025-05-22T14:14:32","modified_gmt":"2025-05-22T08:44:32","slug":"the-importance-of-growth-assets-in-your-portfolio","status":"publish","type":"blog","link":"https:\/\/1finance.co.in\/1f-dashboard\/blog\/the-importance-of-growth-assets-in-your-portfolio\/","title":{"rendered":"The Importance of Growth Assets in Your Portfolio"},"content":{"rendered":"<div style=\"display: flex; align-items: center; justify-content: center; font-size: 20px; margin: 20px 0;\">\n<p><span style=\"font-size: 21px;\">Priya Kumar, a 40-year-old IT professional from Bengaluru, earns \u20b91,50,000 monthly. Despite saving regularly, she worries about her future, especially after witnessing her parents struggle with medical expenses post-retirement. With only \u20b915,00,000 saved and retirement just 20 years away, Priya realizes the need for a strategic plan to secure her financial future.<\/span><\/p>\n<\/div>\n<h2>The Need to Include Growth Assets in the Portfolio<\/h2>\n<p>As of October to December 2024, the current interest rates for key savings schemes in India are as follows:<\/p>\n<ul>\n<li><strong>Public Provident Fund (PPF)<\/strong>: 7.1% per annum<\/li>\n<li><strong>Senior Citizen Savings Scheme (SCSS)<\/strong>: 8.2% per annum<\/li>\n<\/ul>\n<p>While these rates seem attractive, it is essential to consider the <strong>real rate of return<\/strong>, which adjusts for inflation to determine the actual increase in purchasing power.<\/p>\n<h2>Calculating the Real Rate of Return<\/h2>\n<p>The formula for the Real Rate of Return is:<\/p>\n<div style=\"display: flex; align-items: center; justify-content: center; font-size: 20px; margin: 20px 0;\">\n<p>Real Rate of Return =<\/p>\n<div style=\"display: inline-block; border-left: 2px solid black; border-right: 2px solid black; padding: 0 5px; margin: 0 5px;\">\n<div style=\"border-bottom: 2px solid black; text-align: center; padding: 5px;\">1 + Nominal Rate<\/div>\n<div style=\"text-align: center; padding: 5px;\">1 + Inflation Rate<\/div>\n<\/div>\n<p>&#8211; 1<\/p>\n<\/div>\n<ul>\n<li><strong>Nominal Rate<\/strong>: The stated return on an investment (e.g., FD interest rate).<\/li>\n<li><strong>Inflation Rate<\/strong>: The rate at which prices are rising.<\/li>\n<\/ul>\n<p>Let\u2019s calculate the real rate of return for a fixed deposit (FD) offering 7.5% interest with an inflation rate of 7%.<\/p>\n<ol>\n<li style=\"list-style-type: none;\">\n<ol>\n<li>Convert percentages into decimal form:\n<ul>\n<li>FD return (nominal rate) = 7.5% = 0.075<\/li>\n<li>Inflation rate = 7% = 0.07<\/li>\n<\/ul>\n<\/li>\n<li>Apply the formula:\n<div style=\"text-align: center; font-size: 20px; margin: 20px 0;\">Real Rate of Return =<span style=\"display: inline-block; vertical-align: middle;\"><span style=\"display: block; text-align: center; border-bottom: 1px solid; padding: 0 5px;\">1.075<\/span><span style=\"display: block; text-align: center; padding: 0 5px;\">1.07<\/span><\/span>&#8211; 1 \u2248 0.00467 or 0.47%<\/div>\n<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<p>This calculation shows that, despite the FD&#8217;s nominal rate of 7.5%, the real rate of return is only 0.47%, significantly reducing the actual gain after accounting for inflation. Over 20 years, an initial investment of \u20b915,00,000 would grow to approximately \u20b916,45,590 in today\u2019s purchasing power.<\/p>\n<h2>The Impact of Growth Assets like Equity<\/h2>\n<p>Now, let\u2019s look at the same scenario using a growth asset like equity, with a nominal return of 12% and the same inflation rate of 7%.<\/p>\n<ol>\n<li>Nominal Rate = 12% = 0.12<\/li>\n<li>Apply the formula:<br \/>\nReal Rate of Return =<span style=\"display: inline-block; vertical-align: middle;\"><span style=\"display: block; text-align: center; border-bottom: 1px solid; padding: 0 5px;\">1.12<\/span><span style=\"display: block; text-align: center; padding: 0 5px;\">1.07<\/span><\/span>&#8211; 1 \u2248 0.0467 or 4.67%<br \/>\nIn this case, the real rate of return is approximately 4.67%. This indicates a significant increase in purchasing power after accounting for inflation. Over 20 years, an investment of \u20b915,00,000 would grow to approximately \u20b937,37,109.<\/li>\n<\/ol>\n<h3>Conclusion<\/h3>\n<p>The comparison clearly shows that maintaining an asset allocation that includes growth assets like equity is crucial when designing a retirement portfolio. While traditional savings schemes provide stability, they may not be sufficient to combat inflation over the long term. Incorporating equities helps create a more resilient and growth-oriented portfolio, ensuring a comfortable and financially secure retirement.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Priya Kumar, a 40-year-old IT professional from Bengaluru, earns \u20b91,50,000 monthly. Despite saving regularly, she worries about her future, especially after witnessing her parents struggle with medical expenses post-retirement. With only \u20b915,00,000 saved and retirement just 20 years away, Priya realizes the need for a strategic plan to secure her financial future. The Need to [&hellip;]<\/p>\n","protected":false},"featured_media":4624,"comment_status":"closed","ping_status":"closed","template":"","meta":{"_acf_changed":false,"_updated_date":""},"blog-category":[274],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.11 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Why are Growth Assets Important For Your Portfolio? | 1 Finance Blogs<\/title>\n<meta name=\"description\" content=\"Discover how growth assets protect your money from inflation. 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