What is Inflation?

Consumers’ cost of living depends upon the price of each good and the service they purchase. The prices of these goods and services fluctuate over a period of time. 

The government tracks the prices of the most commonly used goods and services over a period of time, known as a basket. It commonly denotes the cost of these goods and services as the Consumer Price Index (CPI). If the CPI increases, it is known as inflation, and if it decreases, it is known as deflation.

Suppose the CPI was 100 at the beginning of the year, and by the end of the year, it reached 110. Therefore, one can say that the annual inflation rate is 10%. It means, on average, the prices of goods and services increased by 10%.

 

 

How is Inflation Calculated?

 

Inflation is nothing but a decrease in the purchasing power of money over time.

Until 2014, India used the Wholesale Price Index (WPI) and considered the general price level of wholesale goods. However, because the WPI neglected the services and certain other vital elements, India shifted to CPI as a measure of inflation.

Inflation is compared to the base year, the value of which one often takes as 100. Following is the inflation rate formula:

 

Inflation = [CPIx + 1 – CPIx / CPIx] * 100

 

Where the CPIx relates to the initial Consumer Price Index

One should use the following formula to calculate the CPI:

 

CPI = (Cost of Basket in Current Year / Cost of Basket in the Base Year) * 100

 

For instance, the price of one liter of milk is Rs. 40 in the base year. After one year, the price of milk reached Rs. 50. Therefore, the inflation will be as follows:

(Rs. 50 – Rs. 40 / Rs. 40) * 100 = 25%

 

How to Beat Inflation?

 

As inflation is the continuous decline of your money’s purchasing power, it is essential not to keep your money idle. 

Currently, the annual inflation rate in India is 7%-8%. Therefore, to beat inflation, your money should grow at a rate higher than the inflation rate. The solution lies in investments.

You need to invest your money in inflation-beating investment avenues that provide higher returns than the inflation rate. It will ensure that while inflation declines the purchasing power of your money, your investments grow your money.

 

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The Ideal Tools for Beating inflation

 

To beat the inflation, the following are some of the ideal investment avenues where you can park your money:

 

  • Equity:

    Investing in the company’s stocks can be a booster to your returns. Equities can provide you with lucrative returns that can exceed 12% annually. It ensures that your portfolio growth outperforms the inflation rate in India.

 

  • Mutual Funds:

    Mutual funds typically pool money from the investors to invest in the assets as specified in the scheme. Multiple mutual fund schemes are available that can suit each investor’s preference and risk appetite. Returns from mutual funds have historically beaten inflation.

 

  • Debt Instruments:

    Investing in debt instruments typically involves investing in assets like bonds, debentures, etc. They are fixed income instruments that provide returns in the form of interest and capital appreciation as per the terms. Debt instruments offer returns that are greater than the inflation rate in India.

Other assets whose returns can beat the inflation rate are gold, real estate, government securities, etc.

 

Growing Your Wealth is a Result of Investing Right

 

Your portfolio must deliver higher returns than the along with your wealth. Making the right investments is the key! Selection of the right assets is critical to earning good returns while keeping your capital intact.  

 

For selecting the right assets, ask yourself the following questions:

  • What is my goal of investment?
  • What is my risk appetite?
  • Do I possess adequate knowledge before investing in the stock market?
  • What is the tenure for which I will stay invested?

Answering the above questions will help you select the right assets.

 

Not Risking It can be Risking It!

 

As the saying goes, ‘Higher the Risk, Higher the Returns.’ If you are willing to earn returns that beat the annual inflation rate, you need to undertake a certain amount of risk.

Diversifying your portfolio is one of the most effective ways to take calculated risks. It ensures that you earn good returns along with beating investments while also having secure assets to reduce your overall portfolio risk.

 

Get More Help if You Need It

If you need more help, always feel free to contact your investment advisor. 

Further, suppose you think you do not possess adequate knowledge for investing in assets like equities. In that case, you can always resort to mutual funds that expert fund managers professionally manage. 

Always ensure to understand the asset before you invest in it!

 

Interested in how we think about the markets?

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