In modern financial circles, nothing perhaps has captured popular perception more than inflation. The media writes about it, policy makers blame each other for it; most of civil society suffers in silence. The vast majority of us are adversely affected by rising food prices and mounting fuel costs.
Though in an economy no-one can escape the effect of inflation, arguably, retirees are the worst-hit of all the groups of people. Inflation wrecks their world, messes up their estimates and forces them to live more frugally.
A big mistake in financial planning, therefore, is failure to take into account the impact of inflationary pressures.
We can begin our attempt to define inflation by referring to rising prices, as measured by price indices, wholesale and consumer included. In simple terms, inflation is the rate of increase in the level of prices for goods and services, a phenomenon that impacts the purchasing power of money.
Inflation is somewhat like rust. It is barely perceived at first. Ultimately, however, it decays. In this case, the decay eats away your savings. The resources you intend to invest need to expand by at least the rate of inflation just to make sure that the purchasing power in your should not fall.
Here is a likely scenario. Imagine a market characterized by 4% inflation. It may not appear to be a big issue on the face of it. Yet, in just a decade, the purchasing power of Rs 1,000 will fall to a little less than Rs 675/-.
Another way of putting it is assuming that the current rate of inflation is 4%. The items you had purchased last year for Rs 100/- will cost you Rs 104/- this year. Next year, these will cost you Rs 108.16, and in ten years, over Rs 148/-.
Inflation: Contemporary Indian Scenario
The Wholesale Price Index (WPI), which is available on a weekly basis, continues to be the most popular measure of headline inflation in India. There are, however, four Consumer Price Indices (CPIs) that are specific to different groups of consumers.
A fairly common approach is to apply a flat rate to estimate future spending. Yet, prices do not rise at the same rate, uniformly over a period of time. Take, for instance, a phenomenon that has been commented on by various sections in recent days. We are referring to decline in prices of certain items – audio equipment, television, long-distance telephone call etc. However, check out the price index for the periods when a few commodities have become cheaper. Chances are that the overall price index has moved up during these periods.
Individuals and inflation
Individuals are hugely affected by increase in prices of goods and services. Items of daily use become more expensive. The cost of irregular, one-off items also escalate. The average person is caught badly in the middle. Besides, inflation is different each year. Predicting it, therefore, is quite difficult, especially if such prediction has to be made for brief period. It is almost impossible to predict the price of each and every item.
Compare the prices of everyday commodities over the last several years and you will know how expensive things have become. The point is inflation weakens the value of your Rupee, which affects the purchasing power of individual.
Inflation and investment
A base fact of life is that expenses will mount: a situation that you will not be able to wish away. Your rupee must work harder for you in an era when your regular income lessens. While that is a difficult goal to achieve, there are some standard rules to which might help you lead towards it. Choosing the right asset to invest is a major rule. Historically return on stocks had always beaten inflation. There is no reason why it shouldn’t continue to do so in future. So if you would like counter inflation you need to choose a good diversified equity mutual fund
Know more about Equity Schemes offered by SBI Mutual Fund
However if you would like to play a little safer here – you may always choose a debt fund, from a range of Debt Funds offered by SBI Mutual Fund
Know more about Debt Funds
Gold is another object which had historically considered as an inflation hedge. You may consider investing in SBI Gold Fund to take position in this precious metal.
The purpose of wealth accumulation is to make sure that every person has enough capital, the insufficiency of which may turn into the top-most limiting factor.
Saving, therefore, is a compulsion for capital formation. The latter (savings) may be seen from 2 sides:
- Increase in the volume of savings so that resources may be released for capital formation
- The very act where savings is converted to investment
Both will ensure that resources are actually used for productive purposes. At another level, savings can be viewed from 2 (two) angles:
- The power to save: For an individual, it is crucial to have a surplus of income over expenditure
- The will to save: This depends on various human motives – family reasons, need to acquire influence, the desire to be successful etc. In fact, the high interest rate acts as a catalyst to high level of savings.
However one thing is certain: to tackle the inflationary trend, earnings must go up simultaneously. This, of course, is easier said than done. The other way to boost your earning is when your savings earn a lot. To make sure that your savings do this magic, they need to be converted into investments. The habit of investments therefore needs an early beginning and the right balance of assets.
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