Why inflation is nasty and how you can beat this bully
Updated on: 14-Nov-2022 •Ravi Banagere
Did you know the things you could buy for Rs 100 in 2012 costs Rs 168 in 2022?
If you look at the table below, we end up paying more for the same stuff each passing year without giving much thought to it.
This general increase in price is called inflation. It increases the cost of living and lowers your spending power. From milk to petrol to groceries to education and healthcare costs and just about everything we use in our daily lives, the prices keep rising year-on-year and we end up paying more without giving much thought to it.
Inflation, just like interest, adds on top of last year's numbers - this means that the effect is just like that of compound interest but in a negative manner.
How inflation hurts you
India's inflation rate has compounded by 5.3 per cent over the last 10 years. If you think it's a small number and try to neglect it, it can hurt your wealth.
Here is an example. Let's say you had kept aside Rs 5 lakh in your savings account at the beginning of 2012 and earned an average interest of 5 per cent in these 10 years. Now, mathematically you might think you would end up with Rs 8 lakh today but it is not so. The worth of your money would be less as you didn't include inflation in your calculations. In reality, you would have ended up with just around Rs 5 lakh only. Basically, inflation ate up all your gains! And this is the story of millions of Indian middle-class savers. After years of meticulous saving in instruments like bank deposits, people hardly earn any returns over and above inflation, let alone generate wealth.
The invisible thief
The problem with inflation is that it's invisible, but its effect is very real and you cannot escape it. People usually think about investing in nominal terms. Put simply, they never include inflation in their calculations. It never occurs to them that it shrinks the amount of wealth they think they would make with their investments over the years.
Look at the illustration below. It demonstrates how your target amount might be higher than what you think. Basically, today's Rs 1 crore will be Rs 3.38 crore in 25 years' time. Blame it on inflation!
How to beat inflation
The only way to beat inflation at its own game is to earn good returns. And equity is the only asset class that beats inflation hands down in the long run.
But isn't equity risky? What if you lose your money? You must have heard many such doomsday theories, right? But what doomsayers ignore is that equity - unlike fixed deposits (FD), bank savings accounts or instruments like Public Provident Fund (PPF) - has always delivered higher returns than inflation from a long-term perspective.
But what if you do not have the knack or the time to pick stocks on your own? In this case, equity mutual funds are an excellent option for you. Here, all the decisions like what to buy, when to buy and when to sell are taken by a professional whose job is to manage people's money. Secondly, if you are investing for the long-term, the risk in equity funds reduces substantially.
You can learn more about equity investing in mutual funds from our Get Started section, which is specially curated for people like you.
So, while investing in equity-oriented mutual funds might seem risky to you at the moment, please note that inflation is riskier. And since inflation cannot be avoided, we can make sure to beat it by only earning more than it.
New to investing? Check out our specially curated page for beginners.
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