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Investing to Beat Inflation
Inflation is like rust. It slowly erodes your purchasing power. It eats into your savings, leaving a lesser value of the same amount with each passing year.
For example, if you have invested in a bank deposit that gives you a return of 9.5% per annum and if the inflation is at 7%, then your real saving or net saving is only at 2.5% (return of 9.5% - inflation of 7%). While it may not look so worrisome for a year, it has a great impact over long-term savings. If your child’s school fee in class 1 is ₹50,000, then the same fee, when he or she reaches class 12, will be a little over ₹1 lakh assuming 7% inflation. Similarly, ₹10,000 saved now will be worth just ₹2,584 after 20 years. While there may be no escape from inflation, there are ways of beating inflation.
Essentially, one needs to choose investment options that have the potential of giving a much higher return to offset the inflationary decrease in purchasing power and hence savings. One of the best methods to beat the inflation monster is to invest in equity mutual funds for long-term. The following three reasons tell us why they might be your best bet against inflation.
Returns
Compared to other popular options like bank deposits, PPF account or gold, equity mutual funds have given an average return of 13%-15% in the last few years. Investing in equity mutual funds over the long-term ensures that the real rate of savings remains much higher than 1%-3% as in the case of other instruments.
Tax Benefits
The returns from equity mutual funds are tax free if held for more than a year. Hence the returns become tax free over the long-term. This also gives you higher average returns.
Diversification
Diversified equity funds invest in a wide range of companies. Suppose if the GDP of our country grows at 6%, then these companies grow to the tune of 13% (adding 7% inflation). This growth is also reflected in higher share prices and consequently higher returns for your investments.
These three factors make equity mutual funds one of the best asset classes to beat inflation in the long-term. Investing in them will not only keep your savings in the positive but also help you attain your financial goals, inspite of inflation.
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#1
Start investing early, even if it is a small amount in a Systematic Investment Plan (SIP).
#2
Stay invested irrespective of the market cycle to get higher long-term returns.
#3
Always take into account the impact of inflation to calculate the real returns on an investment.
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