Margaret Thatcher once rightly said that inflation is the unseen robber of those who save.

WHAT IS INFLATION?

Let’s understand in simple terms what inflation is: It is the general increase in the price of goods & services in an economy over a period of time [1] .

People who save often forget to take into account the growing prices of various products, both essential as well as non-essential. This price change in turn affects the purchasing power of their savings.

WHY IT CAN NOT BE IGNORED?

Consider the cost of higher education in India. It is an expense that most parents are wary of due to continuous hike in fees. However, they fail to provide for it adequately when they start saving for it.

• For example, the cost of an IIM education (tuition fees and boarding only) in 2010 was INR 6,00,000/-* and today, in 2020, it costs around INR 20,00,000/-*. In 10 years, the cost has increased by 230% i.e. an inflation of around 13% each year.

This is just one instance.

There has been a consistent rise in prices of other products & services as well, such as: 

• public transport fare
• entertainment
• food
• clothes & accessories, and others

Most of these are what people consume on a regular basis. Coping with this increase in regular expenses along with saving for major life events like children’s education, weddings, retirement, etc. can be very stressful unless we plan early.

The thought to reflect here is how do we prepare for this inevitable phenomenon called Inflation?

The answer is INVESTMENTS.

EFFECT OF INFLATION ON INVESTMENTS

First let’s take a look at what would be the value of Rs. 100 invested in 2010 today for some of the financial products:

If the value is less than Rs.196 (inflation adjusted) you are losing money

Source: @india.in.pixels

While some products have given high returns others have been below expectations. The interest earned on these products was not enough to beat inflation.

Consider another example:

• You have put Rs. 1000/- in your savings account that earns an interest of 4%. So in one year the value of your savings will become Rs. 1040/- . Now let’s assume that the inflation rate during this period is 6%. So a product which would cost Rs. 1000/- will now cost Rs. 1060/-. Thus, even if you earned Rs. 60/- it wasn’t sufficient for you to make this purchase.

The real value of your return is actually negative.

Inflation thus dents your savings and reduces your purchasing power.

So do we just invest in the most attractive product in the market? NO.

Many of us are aware of the disclaimer that financial products are subject to market risks. High rates of interest usually imply a higher risk as well.

This risk may be partly offset by diversifying investments across multiple asset classes.          

CONCLUSION                                                                        

A well thought out investment plan maps your investments with goals and also optimises your risk by proper asset allocation and diversification.

Hence, invest early, consistently, and review them periodically. For any help with this, seek professional advice to ensure that your investments don’t lose pace with your life and lifestyle goals.

[1] Investopedia

*Indicative prices