Guaranteed Returns: Reality or Myth?

passive income

Every Investor before investing asks the same old question. If the returns are guaranteed? which brings us to conclude that we need to first be clear with the answer to some questions like ‘What are guaranteed returns?’, ‘Can the returns be guaranteed?’. If yes, who guarantees it? Everyone falls for the term ‘Guaranteed Returns’ but falling for it is the same as believing in the existence of a unicorn. Sadly, both don’t exist. Those who believe in guaranteed returns invest somewhere in the name of it, then fall flat on their face with a big loss only to regret their decision and again start looking for another source of guaranteed return. This is a vicious cycle of Bad investment in the name of something as unrealistic as guaranteed returns. Returns can only be assured, never be guaranteed. 

Why not guaranteed?

The guarantee word is really a myth because the money in your pocket is not guaranteed, it can be pickpocketed, the money in your home vault is not guaranteed it can be stolen. Even the money invested in Fixed Deposits in banks doesn’t guarantee returns! A bank can only assure you the returns under normal circumstances but we have also seen cases where the banks itself have failed. Few examples in the last 12 months have been PMC bank, Yes Bank & CPK Cooperative Bank. If the bank fails at best the government in India assures you a sum of Rupees Five Lacs. There have also been cases where the government itself has failed like in the case of Egypt, Greece, Turkey and many other countries. In such cases, people lose all their money let alone return on investment. 

So, a guaranteed return is just consoling ourselves and hiding our head in the sand like an ostrich and pretending that nothing is happening.  These are all real examples which happened recently around us.  This again brings us to conclude that there is no such thing as guaranteed returns. We never know what is going to happen next in the economy and thus seeking guaranteed returns is only going to be bringing us losses. 

If not guarantee, then what?

We all know that return is the reward for the risk taken and thus it is an undeniable fact that every investment will have its own inherent risk. We can minimize it but not make it totally risk-free especially when it is the systematic risk. The above-mentioned cases of losing money are examples of loss of returns due to systematic risk. Systematic risk refers to the risk inherent to the entire market the market risk affects the overall market, not just a particular investment or industry. What the investor should seek is a good risk-adjusted return or a good Risk: Return ratio, not guaranteed return.

How to know the risk?

People must accept that guaranteed returns is a myth and that every investment should be backed by good research with proper calculations. One should know the amount of risk associated with that investment and then see if the investment goes with their risk profile or not. This can be done by self-analysis or delegation to a financial expert. If only the investor’s risk tolerance allows a certain risk: return ratio, should the investor participate.