Inflation and its impact on our investments

Price rise or inflation is a ‘silent killer’ of our investments. The return you get must be higher than the inflation rate for your investments to serve their real purpose.

Inflation is a hot topic of discussion these days. Newspapers and TV channels are full of reports that talk about how inflation, or price rise, is affecting the lives of Indians. Every week, the inflation numbers are more eagerly awaited and discussed than the Friday’s film release.

So what is inflation? And how does in impact us in the long run?

We have all heard stories of their good old days from our parents and grandparents tell us about how you could get a litre of milk in twenty five naya paisa and eat a meal out for Rs 5; how movie tickets used to cost 50 paise and more recently how with one hundred rupees of petrol in your car you could drive to office and back for a week.

“Look how times have changed. Things are so costly now,” they tell us. In layman language, this is inflation. It is nothing new. And yes, it is reflected in the prices of all items we buy.

But let’s look at it from another angle – inflation suggests that the purchasing power of money has come down. In short, for example the Rs 100 that could get us to office and back has probably become Rs 1000 today. In order to get the same service or product we have to pay 10 times more now.

This is one truth that most of us don’t budget for while planning for our future.

Inflation is a ‘silent killer’ of the investments that we are making today. A client of mine had purchased an insurance plan wherein after paying Rs 12,000 p.a. for 10 years, he was ‘promised’ a return of Rs 1,50,000 after 10 years. Looks good on the face of it? But look at the return that you are getting after an investment of 10 years – 6-odd percent per annum, which is lower than the inflation rate. So in reality your money at that time will not even allow you to purchase what it can, today. A sheer loss and a waste of time and opportunity!

Let’s take two examples and look into the future:

Assumption – you are 30 years old today and inflation rate is 10% p.a.

- If your monthly household expenses are Rs 30,000 today: at age 45 you would need Rs 1,25,000 to meet these same expenses.

- Rs 10,00,000 today would be worth Rs 2,05,000 by the time you are 45.

Whenever we buy products like insurance or invest in mutual funds or PPF, etc. with the purpose of achieving a financial goal, we must always take into account the impact of inflation on our end-corpus. It is definitely not going to be worth what the numbers today indicate. It is imperative that the return on our investments beats inflation in the long-run. Only then will we be able to meet our future requirements.

So the next time your ‘advisor’ tells you that so-and-so policy will get you Rs 1 crore in 25 years, do ask him what that Rs 1 crore will be worth then.