A lot of people look at investing as merely setting money aside. But what a majority of people don’t realise is that investing isn’t just about generating returns on money; it is about generating enough returns to beat inflation. If you do not take inflation into accord then, it can put your goals at risk. In pretty much the same way, rising inflation erodes the value of the principal on fixed income securities.
Why don’t we understand this concept better?
We have all heard tales of how 30 years ago prices of food items were a few rupees and things were much cheaper than today. Let me explain this to you by an example, say 10 years ago you could purchase 10 items with Rs. 100. Today the purchasing power of Rs. 100 has boiled down to 5 or 3 items – indicating that it has gone down by more than half. This would not be such a problem if your income levels have gone up at the same pace.
The average inflation in the past 5 years has remained close to 6.38%. A traditional FD provides you returns close to 7% (before tax) – indicating you are meagrely earning above or almost at par with inflation levels. Hence, if you do not invest properly, or stick to investing in traditional instruments in the best-case scenario, you will sustain yourself at bare minimum levels.
Therefore, we take you through a few essential points to make the most of your savings especially when you want to counter inflation.
People often underestimate the importance of financial literacy. In this day and age – it is extremely important to educate yourself about various financial instruments to make sure your money grows along with your investment amount. As mentioned earlier – in case you invest in an FD, your returns will be slim when compared to rising inflation rates. Here, it becomes essential to look at investing in a mutual fund. A mutual fund helps you to multiply your money as it is dependent on the stock market conditions.
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Know about the whereabouts of all the investment instruments before investing your money in it.
You mature along with your age; similarly, your choices of investment instruments should mature along with you. In your 20’s, the major chunk of your investments should be in equity. While as you start ageing and stepping into your 30’s & 40’s, your priorities will change as you may start planning a family and your investment exposure in equity should go down and you should contemplate investing in debt funds and you can focus on also contributing towards your retirement fund. During your 50's-60's, your focus should be more on instruments which gives you steady returns and have minimum risk. Most importantly, redirect most of your funds during that time to generate a retirement fund.
The important point we want to bring to your attention is that you can never keep following one single investment strategy all your life. You need to dabble across different investment instruments to maximise your returns and thereby beat inflation.
Therefore, before planning your investments for the next year – keep these simple points in mind:
Happy investing!