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Introduction to Wealth Protectors

Instruments which give less than12% p.a. and are just protecting your savings against inflation.

Why are they widely accepted?

These are perceived to be ‘Risk free’ (which may not be true) and most people dislike Risking their hard-earned money as they consider the risk of losing principal to be ‘The Biggest Risk’ associated with investing.
So they are more comfortable with Wealth Protectors and associate them with Peace of Mind.

Advantages

Some are excellent options for short term goals.

Some are good tax saving options.

Govt. promotes certain plans by giving incentives for investing in them.

Disadvantages

1. Risk of Inflation

This is one of the biggest and most under-estimated risk associated with such instruments.

If the rate of return is less than inflation you can actually lose purchasing power over time.

For example, if your safe investment is earning 8% a year, and inflation is 10% a year, even though your principal is safe, you are actually losing purchasing power .In reality, the loss of purchasing power due to inflation can work like erosion and cause just as much damage.

2. Liquidity comes with penalty

In case you want to exit your investment commitment it may come with a penalty.

Eg: In PPF closure is only possible after 15 years and partial withdrawal after the 7th year.

In FDs premature withdrawal gives you lesser interest.

In Insurance products even principal is not fully recovered on early exits.

Our View

If you have a long time-frame, to avoid loss of purchasing power and wealth creation, consider moving some of your long-term investments into growth or income producing instruments.