Inflation - Effect on Investment

What is inflation? It is simply the price rise that we experience in our day to day lives. Inflation is thus perceived as something bad because rising prices reduce our saving power.

It is a given therefore that whatever funding options we are planning to have for our future should be able to tackle this price rise or inflation. This is one important aspect which needs to be factored in, when learning to invest in the right instruments.
Simply stashing away amounts into various deposits or letting it remain in savings is an unscientific approach and will not solve the purpose. The amount will seem to be in surplus now but as prices increase the same amount with its meagre returns in the form of interests will seem less.  That will be prove to be inefficient in the long run and some day or the other inflation will play catch-up and erode all our value.

Is it possible at all to keep the effects of inflation at bay? Yes it is. But for doing that, we need to constantly factor-in the inflation rate year after year, when we plan our investments. Here are some pointers which may be of use to you:

• Rather than thinking in terms of simple returns of investment, think in terms of Inflation Adjusted Return.
• Select a time-frame, say 5yrs, and try to see how much returns you will get with the investment option you have chosen. Again, think about Inflation Adjusted Return.
• It should be understood that a single investment option, by itself will not be able to achieve your purpose. You need a mix of various investment instruments catering to long-term and short-term, in the right proportion. The various options that you may explore are :
  
  
  • Bank deposits, Corporate deposits and other such debt instruments giving a fixed interest
  • Mutual fund investments
  • Equity/Stocks
  • Property/Land investments

• It should be understood while deciding on your investment plan, that the period of investment in each of the above options is varied to get meaningful returns. Some are better suited for the long term and some are better suited for the short and medium term. Speak to a financial adviser to get the correct mixture suitable for you.

• Try to calculate whether the returns expected from the investments chosen can be above the expected rate of inflation for the selected time period.

Studying your investments like this is not an option. It is a necessity if you are to stay away from the clutches of price rise and lead a comfortable life. Only if your returns on investments are above this bare minimum level, can they be meaningful and useful. So, when learning to invest and checking on investment options, as a rule, you must factor-in the effects of inflation. Once you are habituated to do this, you will not feel the pinch of price-rise and your saving power will not be diluted due to economic situations.