After a muted phase, consumer inflation is beginning to stir up again. According to official reports, consumer inflation surged to 6.07% in July, stemming from escalated food prices. According to economists, the number is not likely to tone down anytime sooner.
The Bitter Truth
On the backdrop of this information, it is imperative to review the impact of this rising number on investments. At the same time, there is one more aspect that can not go without closer evaluation, which is the fact that middle class and upper middle class income groups witness higher inflation than what is reported in Consumer Price Index (CPI). The composition of CPI is such that rise of prices across certain components is not correctly reflected in CPI and thus, the number fails to factor in the real burden on middle class and higher levels.
This implies that investments made based on assumption of 6% inflation might not fetch the same corpus as intended at the end of the term.
Below table shows corpus that will accumulate at the end of specified terms after taking different inflation rates. To keep understanding simplified, lump sum investment of Rs 1 lakh at the rate of 12% is used for calculations.
Corpus At The End
|
Inflation
6%
|
Inflation
7%
|
Inflation
8%
|
5 Yrs
|
1,31,692
|
1,25,655
|
1,19,942
|
10 Yrs
|
1,73,430
|
1,57,885
|
1,43,860
|
15 Yrs
|
2,28,395
|
1,98,387
|
1,72,550
|
20 Yrs
|
3,00,775
|
2,49,280
|
2,06,960
|
25 Yrs
|
3,96,100
|
3,13,225
|
2,48,230
|
30 Yrs
|
5,21,632
|
3,93,575
|
2,97,735
|
The above illustration evidences that an incorrect inflation assumption can jeopardise the end-objective of the investment itself. For instance, expected corpus of Rs 50 lakh at the end of 15 years might not become a reality if inflation considered is conservative. This calls for a focussed approach and rebalancing of portfolio both in terms of expected inflation and rate of return.
Investment Alternatives
In case of shortfall in corpus, an individual is either forced to reduce the consumption or increase savings to beat the impact of inflation. Apart from this, investors can also adopt smart strategy of shifting their funds from low yielding instruments to high yielding instruments while taking care of the time element. Investments meant for long-term should definitely be shifted from conservative investments to equity-based products.
Here’s a glimpse of investment alternatives that aim to outpace inflation over long-term.
Investment Alternative
|
Returns
(per annum)
|
Beat Inflation
|
Risk
|
Appropriate Time Horizon
|
Large Cap Equity Funds
|
10%-12%
|
Yes
|
Moderate - High
|
Long-term
(Above 5 Yrs)
|
Mid Cap Equity Funds
|
12%-15%
|
Yes
|
HIgh
|
Long-Term
( 7-10 Yrs)
|
Balanced Funds
|
10%-12%
|
Yes
|
Moderate
|
Mid-Term
(Upto 5Yrs)
|
Bond Funds
|
9%-10%
|
Slightly
|
Low - Moderate
|
Mid- Short Term
Upto 3 Yrs
|
Liquid Funds
|
8%
|
Slightly
|
Low Risk
|
Short-Term
(Upto 1 Year)
|
Gold
|
6%-7%
|
No
|
Moderate - Low
|
Not Recommended
|
Bank Deposits
|
8%
|
No
|
No Risk
|
Not Recommended
|
Savings Account
|
4%
|
No
|
No Risk
|
Not Recommended
|
PPF
|
8.1%%
|
Slightly
|
No Risk
|
Not Appropriate For Long-Term
|
Final Word
The above table explains the alternatives that are available to an investor. Rather than letting inflation snatch away value of your hard-earned money, it’s better to invest wisely and adjust your portfolio to keep returns higher than inflation.
About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. Reenika Avasthi is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.
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