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Invest the Right Way and Beat the inflation

The Reserve Bank of India is in a dilemma to whether to cut key rates when inflation is on the rise.

As per the recent data by the Central Statistics Office (CSO), the CPI (consumer price index) for February was 10.91% as against 10.79% a month ago. The spurt in CPI was fuelled by an annual rise in cereal prices (by 17.04%) in February. The pulses and products also shot up year-on year by 12.39. The spurt in CPI was imminent as food accounts for a larger share in the basket.

Inflation is a double-edged sword, as it pushes up the costs of essential products and services on one hand. On the other hand, it eats into the returns earned on your investments.

In simple words, inflation reflects the actual value of your money when compared between two periods of time. A movie ticket in the 1990s may have cost you Rs 50. Today a movie ticket will cost you at least Rs 200, this rise in price is partly because of inflation.

Inflation and Investments

On the saving side, inflation eats into the value of idle cash lying in your bank account.

Secondly you have to compute the real rate of return to assess the impact of inflation. To analyse the impact of inflation on your investments, you have to compute the future value after factoring in an inflation of 8-10%. This will give your accurate results on the actual return earned on investments.

Investments such as fixed deposits, PPF or NSC assure safe and fixed returns. At the same time, they are not capable of beating the inflation. For instance, the annual return on PPF is 8.8%. However, if the inflation rises at 9%, the real rate of return is negative. Hence you have to invest in real estate, gold, and equity, which are considered good hedges against inflation on a long-term basis.

Impact of inflation on retirement planning

In case of retirement planning, you should provide a certain mark-up at the planning phase itself. You have to do a certain loading on the numbers today to understand if the future value is sufficient to maintain your lifestyle.

If you spend around Rs 30,000 for monthly discretionary expenses, you will require a monthly pension of Rs 3 lakhs just to maintain your current lifestyle. Hence you have to factor in inflation at least 8-10% so that you save enough for your golden years.