Return of the Money!

If your money doubles every five years, the compounded return that you are earning on your investment is somewhere close to 15%. Similarly, if it is doubling in every four years, the compounded return is in the vicinity of 19%. Have you ever wondered how long it will take to double your money if the interest rate is as low as 0.01%? Well, you don’t have to do the math. We will save you the effort and let you know that it will take all of 6,932 years! Yes, you’ve read that right. It will take a mammoth 6,932 years to double your money if you are earning a return of 0.01%.

While this may seem like a joke to you, people invested in the US money market instruments currently are earning just that, a paltry return of 0.01%. Bill Gross, who runs the world’s biggest bond fund at PIMCO, believes that it is the measly return in the US that is driving investors towards higher yielding asset classes like gold and emerging markets. But can the US Fed continue maintaining short term interest rates at such low levels, especially given the fact that the specter of bubbles is being raised in most high yielding asset classes? Indeed, says Bill Gross.

According to him, Fed’s foremost worry is the recovery of the US economy. Unless the US economy recovers and its employment scenario improves dramatically, Fed will continue to hold interest rates close to zero, asset bubbles or no asset bubbles. Gross is also of the opinion that once China starts letting its currency appreciate, which it would in about six months time, asset prices might come down and hence, the US Fed should not be hasty in its decision to tighten monetary policies and put the fledgling recovery under further pressure. Gross’ prognosis also has implications for Indian investors. Since easy liquidity policy is likely to continue for some time to come, we believe that Indian markets might witness renewed surge from current levels and may even start resembling a bubble. Hence, the temptation to make that quick buck has to be avoided.

Please bear in mind that in an effort to increase the return on money, investors should not put themselves in a situation where they have to forego the return of their money

Source: Moneycontrol.com board

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