Is cash the safest investment option?

Considering 12 per cent inflation and savings bank return of 4 per cent per annum all your cash burn out in 12 years.

Investors (let me not confuse you with savers, here, I am not making a distinction) -- come in many forms. Those who have no appetite for variability (wrongly termed as risk) think cash is the safest form of investing. Is it?

Well there are three things that destroy cash: Inflation, taxation and time.

Over long periods inflation can (and will) destroy money that is kept in cash. Assuming cash means savings bank -- you will get about 4 per cent return on your money and on that you will end up paying 30 per cent income tax. Ouch, it hurts.

In an economy with inflation impacting you by about 12 per cent per annum this means your money is de-growing at 10 per cent. Give or take one or two years, your money will be destroyed in about 12 years time assuming you do not withdraw at all.

What if the portfolio has say 70 per cent bonds? Well bonds too will try to combat headline inflation -- or the wholesale prices. So at least say 70 per cent of your portfolio will fight (a losing) battle with inflation; so the run to zero will take a little longer -- say 20 years time. Your portfolio will run to zero for sure.

What about a portfolio with about 30 per cent in good quality equities? This portfolio should do well over a long period of time.

Typically a pension plan or a child plan (having a 20-30 year view) has this combination. The equity portion makes sure that inflation is combated well and the equity provides for the growth.

The assumption of course is that the 70 per cent in debt is in bond funds / good quality bonds so that it provides stability and there is no market risk of the bonds.

What about a portfolio which has about 70 per cent in equities and about 30 per cent in debt instruments? This is the portfolio of HDFC Prudence Fund -- and the universally classic asset allocation fund.

After reading these various investment options, I leave it to you to decide if you want to stay in cash or not!

Illustration: Uttam Ghosh/Rediff.com