Is Inflation a risk for you and your investments?


What Is Inflation Exactly?

The term “inflation” is used to describe the gradual rise in the cost of goods and services as well as the decline in the purchasing power of money.

Your purchasing power is reduced. Consider what Rs 10 meant to you as an adolescent and what it means to kids today. Every year, prices rise, but does your income also rise in line with inflation? Not in every situation.

Here is where people with middle-class and poor incomes struggle to keep up their level of living. Even though a 2 to 3% inflation-related rise in your normal spending may not seem like much in the near term, it can have a big impact in the long run, especially when planning for retirement.

Make your Savings ‘Inflation-Proof’

It can complicate the struggle between income and expenses. As a result, while investing for the future, consider strategies that have a track record of outperforming inflation.

What Causes Inflation To Occur?

A significant economic threat is inflation. The imbalance between supply and demand is the major cause for inflation to increase. When demand is high and supply is limited, inflation is inevitable. Consider the high rising housing costs in big cities like Bangalore and Mumbai. Due to a lack of supply, organic fruits and vegetables are also more expensive.

Additionally, prices increase in tandem with increases in the costs of raw materials and labour. When individuals are prepared to purchase goods and services, there may be an increase in inflation.

Let us understand with an example

Our cost of living rises by 5% to 7% annually due to inflation. Let us see the effects of inflation on you and how to overcome them.

Let’s first understand with the help of an example. You are going to a cafe in 1998 to have a cup of coffee. You only have to pay Rs 20.

Imagine that you return to the same café in 2022 and get the same coffee, however this time it costs you approximately Rs 100 (given that inflation is 7% annually).

A simple example of how inflation is working against you is the enormous price increase on a single cup of coffee. As a result, everything we buy and consume is impacted by inflation, also known as the rise in the “cost of living.”

The annual average rate of inflation in India has been roughly 7% in the past which has now come down to 5.7%.

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Are You And Your Investments At Risk Due To Inflation?

YES! The risk of inflation is high if you have a substantial portion of your portfolio invested in fixed income instruments.

If you have a large amount of cash or cash equivalents, it will really hurt more. According to a saying, “what compound interest brings, inflation takes away”.

‍In other words, decompound interest, or inflation, is the opposite of compound interest. The result is comparable to compound interest because each year’s inflation is added on top of the inflation from the previous year.

Think about the example below: You put one lakh rupees into a deposit that returns 6% annually. Prices are rising at a rate of 6% per year on average at the same period. Your compounding returns will just about keep up with inflation in this circumstance. So, after ten years, your Rs 1 lakh will have grown to Rs 1.82 lakhs. But on average, the things you could have bought for Rs. 1 lakh now cost you Rs. 1.82 lakhs. Your wealth isn’t really growing; it’s only a mirage that will be completely nullified by price increases.

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How Then Can You Beat Inflation?

Although it is impossible to foresee how inflation will affect each of your investments, you can look into alternative solutions:

Check And Review Your Monthly Budget

‍Your home budget will need to be revised. Examine both your necessary and optional spending. Look at your selections and see where you can make cuts. Limit your outside dining and/or discontinue some subscription services, whatever works for you.

Consider your options and look for areas where you may save money. Reduce your outside dining or stop using some subscription services, however you like. Another way to keep on track is to maintain your household budget as a percentage of your income.

For instance, if your salary is 50,000 and your household expenses are 30,000, your cost of living is 60% of your pay.

You ought to be able to maintain your housing costs at 60% of your salary by cutting back on discretionary spending. Keep inflation in mind when you make your financial goals.

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Spend Money On Gold And Silver

As everyone is aware, commodities like gold and silver have traditionally been employed as inflation hedges. Investors turn to gold as a safe haven when the value of a currency declines.

It generates profits above inflation. An investor’s portfolio should contain between 10% and 20% of gold. It should be viewed as a long-term investment. If you don’t already own gold as an investment, you can gradually expand your holdings by investing in gold ETFs, gold mutual fund savings plans, digital gold.

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Purchasing Shares Or Mutual Funds

‍It’s one of the best methods for combating inflation. Stock investing is risky, as is taught to all investors. However, inflation poses a bigger threat. And you need to invest in something that increases with inflation if you want to keep up with it and make actual profits on top of that.

In order to help you resist market volatility and inflation, you can also invest money in a SIP (Systematic Investment Plan) over a longer period of time. There are various mutual funds that provide robust returns adequate to battle inflation.

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Save A Little Amount From Your Salary To Invest In Chit Funds

Invest in Chit Funds

Chit fund is a unique savings and borrowing instrument when compared to other financial systems.

Chits, as a product, provide a plethora of advantages. Some of these benefits include chits being an easy-to-understand savings and borrowing product, less paperwork, and higher returns than a savings account. Chit funds are also free of market fluctuations, unlike equity instruments, bonds, and mutual funds, and have a disciplinary effect on investors by encouraging a strong commitment to save each month. Furthermore, because it is a highly liquid instrument, it is a useful tool for raising funds in times of emergency. When you invest in chits, you earn a higher return than other financial intermediaries (10%-15% p.a), compared to FD’s/RD’s in banks which might give only about 4% to 6% interest.

When it comes to wisely saving or borrowing, a dependable chit fund platform like The Money Club can always come to your aid.

Download The Money Club App and be inflation-proof.

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