Is Your Investment Return Beating Inflation?
You may wonder before few years you are able to manage all your expenses, with less salary if you are a salaried person, but now you are finding it difficult to manage the same living style with an increased salary. What has changed?? Taking other things constant if you are paying more for the same living standard, it’s the impact of inflation. Inflation has an impact on almost every facet of an economy and your life, starting from the cost of living, spending, business investments or tax policies and on interest rates. Also inflation impact the value of investment returns.
What is inflation and how does it impact investing
In simple terms inflation is a rise in overall price levels or in other terms it is decrease in the purchasing power of money. For the growth of economy, it should be necessary of a Moderately-paced inflation, but both a high inflation and a low inflation or steep deflation is unfavourable to the economy in the long run as it creates a hyper inflationary economy or take the economy in to recession and subsequently even depression.
Your real savings and investment returns is silently impacted by increasing inflation as it reduces the real return. Most of the investors invest with an objective to increase their long-term purchasing power and with certain goals in mind. However, inflation put at risk this goal because as prices move up, the value of goods that you are to purchase with the same amount of money reduces. When your return on investment and rate of inflation are not in tandem, purchasing power is compromised. For example, you are investing now 5 lakhs for your child marriage which will be after 6 years, planned with total budget of 10 lakhs for the marriage (now the same level of expenses can be met with 5 lakhs). But if the real marriage cost after 6 years will cost you around 12.5 lakhs for the same level of expenses, then you are short by 2.5 lakhs, while your investment grows to only 10 lakhs from 5 lakhs. It is impact of Inflation on your purchasing power. You have doubled your investment in 6 years, but the inflation has increased two and half times and you net real return is negative.
Identifying Investment Avenues that can maximize investment returns:
Debt Returns or fixed income returns face a particular threat by inflation. Many Indian investors invest in fixed deposits and bonds as they represent a more secure, steady inflow, be it in the form of interest or payments. However, because the rate of interest or payment on most debt securities remains constant or only sees the slightest of changes until maturity, the return on investment falls short in meeting the inflation rate at that moment, thus reducing or nullifying purchasing power.
However, the prices of certain assets rise in parallel with an inclining inflation.
Generating positive real return by Beating down inflation
Investment in equities is considered as a better investment relative to inflation over the long term because companies can raise prices for their products when their costs increase in an inflationary environment. Higher prices will thus translate into higher earnings.
Equity markets have yielded average returns in the range of 12-15% over the last 10 years. Equity investing over a long period is the prescribed way to stay ahead of inflation.
Nifty Return (CAGR) As on Nov 30 2017:
Source: NSE India
Nifty Growth Chart:
Source: NSE India
Consumer prices in India increased 3.58 percent year-on-year in October of 2017, above 3.28 percent in September and market expectations of 3.46 percent. It is the highest inflation rate in seven months, mainly driven by rising cost of food and fuel. Inflation Rate in India averaged 6.75 percent from 2012 until 2017, reaching an all-time high of 12.17 percent in November of 2013 and a record low of 1.54 percent in June of 2017.
Equity Investment can be done directly by purchasing stocks from secondary market or through investment in mutual funds. Investors who have not more knowledge of market or no time to research and follow the stocks, investment via mutual funds is advisable as they may lack the expertise provided by experts in the fund houses. A diverse equity mutual fund scheme will allow you to earn higher risk-adjusted returns. Furthermore, availing of systematic investment plans or SIPs helps reduce the overall risk that comes with investing as it can normalize the volatility of investment over time period.
For those with larger sums to invest, assets such as real estate and gold at times can also protect against inflation, but real estate lack the liquidity compared to equity investment. So comparing all investment avenues equity is considered as the most returnable investment options that can beat the inflation over longer term and can generate a positive real return.
Disclaimer: Some of the contents are collected from different secondary sources and published reports from other sources. The views expressed is only the writers view and not express any opinion or advise in any ways to anyone.