This Silent Monster is eating all your savings and you are doing nothing about it!!

 


We all have dreams. We dream to become financially independent one day and to retire with a big corpus. Little we may save but so be it. We invest in various schemes and sleep peacefully at night thinking that our piggy bank will turn into kuber's wealth one day.
But what if there is a silent monster out there who is slowly killing our dreams and turning it into a nightmare? Yes I'm not kidding. There is truly a monster out there and its name is Inflation.

In layman's language inflation means price hike or reduction in purchasing power. Do you remember the ice cream you bought at Rupees five in your childhood? Today it is worth ten  rupees. The same ice cream. This is inflation or hike of price of the ice cream.
That same thing but now you have to spend more to buy it. The silent monster is slowly killing your purchasing power.

But can we spare this monster? What we should do to beat it? For that first, we need to understand it more clearly.

Inflafion denotes a rise in general level of prices of goods or services. And this general price level is measured by a price index. How to calculate the price index?
For that Let's imagine a scenario.

Suppose in 2020 the price of ice cream was Rupees 8. One year later in 2021 it has increased and has become Rupees 10.The rate of increase of price is (10-8)*100/8= 25%. So the rate of inflation is 25%.

Most important price indexes are
1. Wholesale price Index
2. Consumer Price Index.

WPI reflects the change in the level of prices of goods or services at the wholesale level mainly traded between corporations. CPI on the other hand reflects the change in the level of prices of goods or services purchased or consumed by the households.

Our main concern is CPI and how it effects our investments.

The current CPI in India in January was 4.06%. So if you have invested in FD and getting an interest rate of 5%, your effective interest rate is 1.06%. If the inflation crosses 5%, you may get negative returns which means reduction of your savings.

Let me elaborate.

Suppose you have invested Rupees Ten Lakh in an FD which is giving a return of 5%. The maturity value after 10 years is Rupees 1647009. But due to the effect of inflation at the rate of 4.05%, it would be worth Rupees 1106262. Not what you have thought right?  Probably you were saving it for your child's college fee. But at the time of requirement it served no purpose. Basically your investment failed to generate desired returns.

What you should do then? Stop investing? Wait! There is still hope. In long term, Mutual funds can generate inflation-beating returns. It gives a return of 12% to 15% on an average in long term. So even if there is an inflation rate of 4 to 5% you are getting an effective return of 8 to 10%.

If you have long-term goals like Childs education, Retirement or your Dream Home you should choose your investment instruments wisely taking care of the effective rate of return. All you have to take is a little risk. Now what is a mutual fund? Let's save it for another blog.












©Deep





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