Understanding Asset Classes

Risk, Return & Inflation in India

Every investment option sits somewhere on three axes: capital safety, inflation protection, and risk-adjusted returns. No asset wins on all three.

1️⃣ Fixed / Quasi-Fixed Return Instruments

(FDs, RDs, PPF, EPF/VPF, SSS, Gratuity, Superannuation, Bonds, FMPs)

  • Returns: Predictable, stable
  • Inflation: Mostly match or trail inflation post tax
  • Risk: Very low capital risk, high purchasing-power risk

Reality: These instruments protect nominal capital, not long-term wealth. EPF/VPF and PPF stand out for their tax-adjusted, risk-adjusted returns, but none meaningfully compound wealth over decades.

Risk-return ranking (within this group): EPF/VPF > PPF/SSS > Bonds/FMPs > FDs/RDs

2️⃣ Gold

  • Returns: Moderate over long periods
  • Inflation: Roughly matches inflation
  • Risk: Medium volatility, no compounding

Reality: Gold is a store of value, not a growth asset. It shines during crises and diversification, but long flat periods hurt its risk-return efficiency.

Role: Portfolio stabiliser, not a wealth creator.

3️⃣ Real Estate

  • Returns: Highly location and cycle dependent
  • Inflation: Can beat inflation selectively
  • Risk: Illiquidity, leverage, regulatory and concentration risk

Reality: Real estate looks attractive anecdotally, but on a risk-adjusted basis, outcomes are uneven. A few winners skew perception; average returns often disappoint.

4️⃣ Equities (Stocks & Equity Mutual Funds)

  • Returns: Highest long-term return potential
  • Inflation: Strongly beats inflation over time
  • Risk: Volatility is high, permanent loss depends on behaviour

Reality: Equities are the only mainstream asset class that has consistently beaten inflation meaningfully over 20–25 years.

  • Equity Mutual Funds offer the best risk-return trade-off for most investors due to diversification.
  • Direct stocks can outperform, but returns are highly skill- and behaviour-dependent.

5️⃣ NPS (Equity-Heavy)

  • Returns: Between equity MFs and EPF
  • Inflation: Beats inflation over long periods
  • Risk: Moderate, with liquidity constraints

Reality: NPS delivers solid risk-adjusted outcomes due to discipline and long holding periods, though flexibility is limited.

📊 Overall Risk–Return Ratio Ranking (Best → Worst)

  1. Equity Mutual Funds (Index / Diversified Active)
  2. Equity-heavy NPS
  3. Direct Equities (Quality, Disciplined)
  4. EPF / VPF
  5. PPF / SSS
  6. Gold
  7. Bonds / Debt Funds / FMPs
  8. Real Estate
  9. Commodities (ex-Gold)

Key Takeaways

  • Fixed returns protect capital, not purchasing power
  • Equities protect and grow purchasing power, but demand patience
  • Best risk-return outcomes come from diversified equities held long-term
  • No asset works across all market cycles
  • Asset allocation should match time horizon, temperament, skill, and expectations

Inflation is silent, volatility is loud—and the assets that feel uncomfortable in the short term are usually the ones that protect wealth in the long term.

Have a nice day,
– AR