People always keep discussing inflation in India and the effect of inflation in our lives. Ever wanted to know what all the talk is about? And why are people so worried about it? What is the effect of inflation? Watch the video to learn the meaning of inflation and the measures to control inflation that you take to invest your savings correctly.
The world of investment is like the combination of the road and the treadmill! How’s that? Well, one’s investments have to run to cover the distance from the present situation to the desired one, and at the same time, there is a treadmill running below the road that those investments follow. This treadmill is “inflation.” And just like anyone on a treadmill, the effect of inflation on investments is that they have to outrun the treadmill to travel further or risk going backwards and away from desired goals. So let us define the meaning of what is inflation. Inflation is a rise in the general level of prices of goods and services over a period of time. And when the general price level rises, it means each rupee buys fewer goods and services. This ultimately reflects erosion in the purchasing power of money.
Assume the current rate of inflation in India is 10% p.a. This means that what you could have bought for Rs.10,000/- last year, costs more this year. But suppose you decided not to spend the money last year, and instead invested it somewhere that gave you a return of 9% p.a. Today, that Rs.10,000/- would have matured to Rs. 10,900/-. But thanks to the effect of inflation you have fallen short of Rs.100/-. You may have been in this situation before, but most of us don’t even notice it.
Because this may not seem like a huge amount, but if investments are constantly unable to keep pace with inflation, over time, the result could be devastating. Assuming the same rate of inflation and a return of, in 10 years you will have only Rs. 23,674, when what you need is actually Rs. 25,937, meaning the shortfall is now Rs 2,264! And unfortunately, the gap continues to increase over time, even exceeding the original amount invested. That’s huge! Imagine if the returns on your investments can’t even keep up with the rise in grocery prices!
The measure to control inflation is… wait for it… is Investing. Pretty obvious, huh? But it’s true! By investing regularly and wisely, one can stay ahead of inflation. It is important to constantly keep track of the ‘Real Returns’ on investments, which is the returns on investments minus the prevailing inflation rate. It is vital to protect purchasing power, so remember to plan ahead, and invest in asset classes that will give high rates of real return over time.
As the rate of inflation in India has highly increased in these years, here are few things to remember about inflation:
• It reduces the value of idle money
• Effect of inflation compounds every year increasing the gap between the current and future value of money
• An efficient way to tackle it is through investing
Don’t compromise on your goals due to inflation, instead re-assess your strategy and accommodate for inflation. Imagine how cool it that! You actually made it on time for your anniversary in spite of being bogged down by the treadmill!
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