Inflation has been rampant over the last couple of years. High inflation eats away at your savings and reduces your purchasing power over time. It is necessary to take proactive steps to protect wealth against the detrimental effects of inflation.
What is inflation and how does it impact your money?
Inflation refers to the overall increase in prices of goods and services in an economy. It is measured by the inflation rate that indicates the percentage change in prices over a period of time. For example, an inflation rate of 6% means prices have risen by 6% over the past year. When inflation is high, the same amount of money can buy fewer goods and services. For instance, if the inflation rate is 7%, ₹100 today will only buy you goods worth ₹93 next year. In other words, high inflation reduces your purchasing power over time.
Using an inflation calculator to gauge impact
An easy way to see the impact of inflation on your money is to use an inflation calculator. Online inflation calculators allow you to input an amount of money and the inflation rate to see its future value adjusted for inflation. For example, if you input ₹5 lakhs today and an expected inflation rate of 6% per year over 20 years, the inflation calculator will show that ₹5 lakhs today will be worth only around ₹2.53 lakhs of today's rupees after 20 years.
How to beat inflation
● Invest in equities via mutual funds
Equity mutual fund investments have historically delivered inflation-beating returns over the long run. The key is to invest regularly in a well-diversified equity mutual fund portfolio for long periods.
● Maintain emergency funds in liquid funds
Emergency funds should be kept in ultra-liquid options like liquid funds or arbitrage funds rather than savings accounts. Though they pay comparable interest, liquid funds provide higher post-tax returns for those in higher tax brackets. Their returns are also more likely to beat inflation.
● Use debt funds for fixed income investments
Fixed deposits and PPF used to be the main fixed income options. But with their interest rates now lagging behind inflation, investors are better off using debt mutual funds for fixed income needs. Medium duration, corporate bond, and banking & PSU funds are good choices.
● Balance portfolio across assets
Don't focus only on financial assets. Allocate capital across equity, debt, gold, real estate, etc. Diversification into alternative assetshedge against inflation.
● Maintain debt-equity balance
Don't be overly aggressive in equities either. Have a balanced portfolio with around 40-60% in debt instruments based on your risk appetite and stage of life
● Track expense patterns
Keep tabs on spending and check for leakages. Avoid wasteful expenditure. Make judicious purchases based on needs vs wants.
● Don't ignore long-term planning
It's key to start investments early despite other pressing needs. Delaying leads to loss of compounding benefit.
Conclusion
Inflation may seem like a slow and benign force, but it can seriously undermine your life's savings over time. People need to become more proactive about investing to earn inflation-beating returns. Equities, gold, and actively managed debt funds rather than traditional fixed deposits are key to win the inflation battle.
Disclaimer: This content is part of a marketing initiative. No TNIE Group journalists were involved in the creation of this content.