Every investor invests their money with an aim to earn profits on their investments. However, the rate of return for the investment may not always be positive. In fact, the risk of earning a negative return exists in every investment. Inflation can impact our investments, in such a way that even though you’re making money. But in a real sense, you will not be making a net positive return on your investments.
What is Negative Return?
A negative return occurs when investors experience a loss in the value of their investments during a specific period of time. For example, if an investor buys $1,000 of Company XYZ stock and then sells it for $500, the investor has a negative return of 50%.
While negative return is a possible risk in a market-linked investment such as a mutual fund or direct share. Fixed-income investments such as bank fixed deposits also carry a different kind of risk. In a market-linked investment, there is a risk of losing a fraction of your investment when the value of underlying securities falls. In a fixed-income investment, the risk of losing capital may not be there (or it may exist in some), earning a negative return on your investment is not very uncommon.
How Fixed-income investments can fetch negative returns?
The negative return risk is primarily a consequence of rising inflation. It pulls the returns lower than expected and thus impacting the final return to an investor. For example, if a bank FD offers a return of 6 percent per annum and inflation is also 6 percent, the net return is almost zero. Thus at times, when FD rates are lower or the inflation is higher, the investment ends up earning a negative return. While the capital invested is safe and secure, the effective inflation-adjusted return could be low or negative.
Should someone avoid investing in bank FDs?
Fixed-income investments are actually more suitable for those investors who are looking for capital preservation rather than to grow money. It is suggested to take a balanced approach in your investment portfolio. If security is what you’re looking for, sure, you can invest in FDs. However, it is advisable to not invest more than 30 percent to 40 percent of your capital in the FDs as they’re not giving the best returns. Instead, you should place your remaining investment capital in other high-yield assets. For instance, gold can act as a valuable asset in times to come.
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