- Posted by: Brighter Mind
- Category: Inflation
How is inflation affecting your wealth every year?
Inflation is the monster which eats away your wealth every year. Believe it or not if you have saved Rs.1000 in year 2000, it would worth only Rs. 290 in 2020. All thanks to inflation due to which the worth of a rupee decreases by time.
All the money you save in bank account or invest in some instrument, inflation takes away some portion of it. And the tough part of inflation is that it also uses compounding effect. So when investing causes your money to grow with the help of compounding, on the other hand inflation suppress this growth with negative compounding.
For instance, you have invested Rs.10 Lakhs in the fixed deposit at 6% per year for 10 year. But at the same time if the inflation is also rising at 6% per year, then after 10 year, the actual value of your money will be Rs.10 Lakhs. Although, the maturity amount will increase to 18 lakhs after 10 years, the real value will be the same. This is because the things you would have bought with Rs.10 Lakhs today would cost Rs.18 Lakhs after 10 years due to inflation.
But this is just one case! What about the saving account which earns you 3% per annum. In such scenario, after 10 years, your 10 Lakhs will grow to 13 Lakhs. However, things that cost Rs.10 Lakhs are still costing 18 Lakhs after 10 years. This means that the saving account has actually decreased the value of your money hence decreasing the affordability.
Actually this example is an eye opener for most of the earning individuals. Many of us save our hard earned money into saving account because it is risk-free. But the reality is your money is very much unsafe in the saving account because there is the major risk of inflation. Unfortunately in India, inflation rate has always been higher than the interest rates offered by the saving account. Hence when you save the money in bank account, you are actually depreciating the real value of the money.
So how can we tackle the inflation?
The answer to this question is to invest in those vehicles which are fetching returns over and above inflation. For instance, you can consider investing in stocks as it is the investment tool which considerably beat the inflation and provide good returns at the same time.
For example, consider you invested Rs.10 Lakhs in equity for 10 years. Now equity generally delivers average of 15% over a longer term. So after 10 years, your investments can grow to Rs.40 Lakhs and the things which cost 10 lakhs is costing 18 lakhs after 10 years. So at the end you are still generating the wealth of Rs.22 Lakhs. This is the real returns generated by the equity, which is actually a profitable affair.
Now many people think that equity is the risky investment. But the real fact is saving account is more risky than equity; because in equity you can generate good inflation-adjusted returns, but in saving account, money gets depreciated over time. Also, when we talk about long term investment horizon, equity investments are safe and risk to capital is minimal.
In fact equity investments is the only investment option which can provide handsome inflation adjusted returns and help you create real wealth for you. So risky or not, if you want to protect yourself from inflation, you should only opt for equity investments. And SEBI Registered Investment Advisor ” Brighter Mind ” will help you for Investment.