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inflation < ɪnˈfleɪʃ(ə)n/noun >

Meaning: a general increase in prices and fall in the purchasing value of money

Jargons are not an investor’s best friend, but there are some terms that affect us so intrinsically that they become part and parcel of our daily vocabulary. The word ‘inflation’ is one such example. Who can forget the days when we all had to turn to ‘saatvik’ food because onions were a dime a dozen, or the clamour at petrol pumps when fuel prices go on a hike!

Yes, inflation affects us all. And it also plays an important role in determining our investing choices. How? This article aims to tell you exactly that…

Why is it important to consider inflation when investing?

When prices are inflated, the purchasing power of your money goes down. Let’s say a burger costs you Rs. 30 today. Next year, the same burger may cost you Rs. 35, due to inflation. So, for the same amount, you will be able to purchase less as the years go by. There is not much you can do about rising prices, but you can build a portfolio of inflation-beating investments that will help you in the future.

Your investments, thus, have to provide you with REAL returns post taxes and deductions due to inflation. Let’s understand this with an example: assume you have Rs. 10,00,000 in a bank fixed deposit for a year. The interest rate is 10% and inflation is at 8%.

financial_planning_inflation

Thus, in just one year, the value of your portfolio has decreased by 1% (Rs. 10,000). A downward trend like this over years can significantly affect your savings and the rainy-day fund that you wish to create.

Ouch! This is tough…

Yes, it is. And remember, not all investments will help you beat inflation. For instance, if you build an overly conservative investment portfolio which only consists of traditional investment tools like Fixed Deposits and Savings Bank Accounts, then you may not be able to beat inflation. These tools do not always provide inflation-adjusted returns.

What will happen in this scenario is that your monthly inflow will remain fixed. However, depending upon the general increase in price level, your personal and household expenses will increase. It is therefore imperative to invest early, and wisely, in asset classes that fulfil our goal of wealth creation and long-term savings.

So, how do I beat the inflation and still get high returns?

The only way to do this is to invest in tools that give you returns that are equal to or higher than the rate of inflation.

Equities are a good way of getting inflation-beating returns. To invest in equities, you could either opt for direct equity investment (i.e. through stocks) or invest through Equity Mutual Funds. Investing in the stock market requires a certain degree of financial knowledge and market acumen. You need to know which stocks to invest in and which to sell in order to make profits.

Equity Mutual Funds, on the other hand, are much easier to invest in. You can either invest in EMF via a Fund Manager or online via ClearTax’s Mutual Fund Portal. At ClearTax, we handpick Mutual Funds based on their past performance. Our portal allocates assets automatically based on your age, income, expenses & obligations towards debts, risk appetite, budget, investment history, investment goals etc.

Apart from equities, you can also invest in debt instruments like Inflation Indexed Bonds which offer high returns. Some traditional investments like gold and property also fare well when prices increase and can form a part of your portfolio.

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