Ever wonder what is the minimum rate of return that you should earn on your capital or how the Banks and Government decide on the interest rate. The minimum return that one should earn for savings is made of three components.
Real Interest Rate – A compensation for deferring your consumption. The money received today has a higher value than the money received in future as the earlier is available to consume now.
Inflation Premium – A premium to compensate for the expected inflation.
Maturity Premium – A premium to compensate for the higher maturity, the notional effect of interest rate changes on your savings increases with the maturity.
The above three returns determines the Time Value of Money. So if the return that an investment earns is less than the sum of above three, your money losses it’s time value.
Wealth Creation as per us can be broken down in two sub goals – Preservation & Accumulation. Any thing less than inflation for a given maturity will make you fall short of Preservation goal, the value of capital will erode over the time if the return is less than prevailing inflation. A return above inflation accumulates the wealth. We help our clients understand their aspiration of returns, set realistic return target, device investment thesis to achieve the set targets and provide end to end execution to meet the end results.