Inflation, Its Impact And Investments Alternatives That Outpace It

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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Make A Choice Between Saving And Investing

Saving and investing are used interchangeably, but in reality, the two have distinctive roles to play when it comes to financial planning. Though both of these functions contribute to the future corpus, realizing the difference between the two is crucial to reap the benefits of a well-planned financial strategy.

Most of the times, people try to focus more on savings and fail to channel it into appropriate investment vehicles without realizing that it is only half job done. This calls for a need to demarcate the features and functions between the two so that savers can become investors and are aware of the fact that risking now is far better than putting everything on stake later. 

1. Risk - Risk is the key factor that draws a line between savings and investments. Any investment vehicle that guarantees the return of principal amount is categorized as a savings instrument. Bank deposits, fixed deposits, NSC or corporate deposits fall under this head whereas those avenues that aim to seek profits but also entail risk of losing principal amount are investment vehicles. Mutual fund investments, stocks, real-estate, forex are examples of investments.
2. Tenure of need - Savings works best when the need is short-term while it loses appeal over longer horizon. For instance, it is appropriate to park emergency funds into saving account or fixed deposit, but it would be unwise to leave retirement funds to sit into the same account. It will not be an exaggeration to state that retirement funds in a fixed deposit, or PF is another way to ensure that your retirement dream never comes true. 
3. Return - Investments, if done right, can fetch extraordinary returns versus savings by making your money work hard. For example, a fixed deposit could have returned an average of 9% to 10% returns while same amount, when invested in a stock, can deliver double returns. Savings seek interest but investments aim for profits and thus, higher return. 
4. Accessibility - Ease of access separates out investments from savings. Easier the access to funds, the higher likelihood that your money is working as mere savings and not investments. 
5. Inflation - Most  important factor to consider is how your money is encountering inflation effectively. Biggest drawback of savings is that interest earned is balanced out against inflation. So cash stacked at your home, money parked in bank deposits are not really working to benefit you but simply losing value with each passing day. On the other hand, investments strive to maximize wealth and aim to negate and grow beyond impact of inflation. 

What to Do Next?

Once these differences are clear, it’s time to pull out the statements and analyze if your money is really working or losing value. Do not fret if you discover that your savings urges did not evoke similar investment impulses as you can still make a difference by undoing the wrong.

If work is demanding and you find it difficult to set the ball rolling then reach out to a Financial Planner to help figure out things for you to help you become an informed investor from an assured saver.

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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