The Rising Factor
You should be aware about the impact of inflation on investment returns and savings?
Inflation is a silent killer. In the modern world, all of us have come to realize that inflation is a destruct or of our savings. An inflation free world is an impossible dream. Reality check is mandatory as inflation is here to stay.
While looking at a larger picture, we see India as a nation that is reeling under the impact of inflation. While economic and monetary reforms help in curtailing inflation, they are not enough to stop it. Nearly double digit inflation rate is bound to adversely affect every household. While loosening your purse strings is one way of absorbing that rising prices, it’s not a very feasible option in the long run.
You never know how and when inflation eats into your Investment Planning returns, as well as your savings. Pulled up by the food inflation, pulses which were available at Rs. 40 per kg have shot up to more than Rs. 100 per kg in the past year.
To understand the impact of inflation better, let’s consider an example. Ramesh wanted to generate RS. 10 lakh in 5 years. Considering an average return of 12%, the lumpsum investment required for this is Rs. 5.67 lakhs. But, if we factor in inflation at 6%, then Ramesh will have to aim for a corpus of Rs. 13.40 lakhs, instead of Rs. 10 lakhs, in 5 years.
In the above example, if we increase inflation rate at 1 % more ( i.e. make it 7%), then Ramesh would need to generate a corpus of around Rs. 14 lakh in 5 years. The risk of inflation, if not anticipated and factored in the savings plan and investment decision, can actually upset one’s Financial Planning goals and plans.
It is now clear that your savings have to be safe guarded against inflation. Planning your finances accordingly is half the job done. All you need to do is ensure that you have a disciplined investment schedule to take care of your future financial need.
We often come across the term compounding – the ninth wonder. The time value for money increases your net worth in a very unassuming and simple manner. For this, you must plan for regular investments early in life – right from the day you starts earning.
The table below reflects how inflation changes the savings and investment outlook.
Corpus required ( in lakhs) 10 10 10
Investment period ( in years ) 5 5 5
Inflation ( in % ) 0 6 7
Future Value ( in lakhs ) 10 13.38 14.03
ROI ( %) 12 12 12
One time investment ( in lakhs ) 5.67 7.59 7.96
One way of looking the ill–effects of inflation on investment returns and savings in the long run is to look at how inflation has been affecting your lifestyle currently. While basic needs such as food, education and accommodation will always remain in top priority, you will surely take some measures to reduce expenditure in travel, electricity and fuel cost. Life style expenses such as purchase of expensive gifts, electronic items and upgrading consumer durables like mobile and cars will probably be put off for the moment.
Eating out, weekly getaways and impulsive purchases are certain other expenditure areas that will see severe cutting down. It is therefore logical to deduce that if inflation is seriously affecting your present life style, forcing you to make some tough decisions, it is bound to impinge on the way you live in the future. With retirement on decrease income, you will naturally rely on your savings and investments. Don’t let inflation eat into your hard–earned money and ensure well deserved future income.
You cannot do away with the inflation. However, you can invest in financial instruments based on the financial goals and risk profile and ensure that inflation does not become a road block in wealth creation and savings plan.