Hello Readers!
Increasing Inflation, one of the biggest reasons why people prefer to invest instead of saving their money, and that too in Equity mutual funds, as they offer inflation-beating returns.
Inflation is the increase in the price of some important or necessary items. The increase of decrease in inflation is always under observation of our central bank as too much of it makes living for everyone.
It is a must for an investor, when they are planning to invest in mutual funds while calculating their goal corpus, they must consider the inflation. Well, advisers do advise always consider the inflation while planning your investment, but the query is do we need to consider inflation for all kinds of our investments?
The answer to this question depends on what the aim behind your investments is. Let us see how.
Inflation For Your Short-Term Investments
When people plan for a short-term investment, their main agenda behind this is to ensure safety and security to their savings. For short-term investors safety of their capital has more worth than the impact of inflation. However, it is a questionable point that whether an investment of less than three-period, give inflation-beating returns or not.
An increase in inflation is has a significant impact on the power of purchasing but only in the long-term that is 3 years or more. Suppose the annual inflation for this year is 5%, that means the value Rs 100 at the beginning will decrease to Rs 95 by the end.
In case of short-term investments like debt funds, that offer returns around 7%, you would have Rs 107 at least, and with the impact of inflation on it, your investment would actually worth Rs 102.
If what you plan to use your investments for is not going to become dearer by the inflation percentage by some margin, then beating inflation is not necessary. Here while choosing a short-term investment, your main agenda was to protect your capital and easy liquidity. Thus, both are fulfilled even after considering inflation.
This is why investing for short term needs means investing in more stable investments such as Debt funds.
Inflation In Long-Term Investments
You must have heard your parent saying, “things were so cheap in our times, compared to today”, this clearly shows how inflation affects the power of money over long-time. A 5% inflation can drive the value of Rs 100 to Rs 50 in less than 15 years. At the very least you want the purchasing value of that Rs 100 to remain Rs 100. Thus, considering inflation-beating returns while planning your long-term is a must requirement.
It has been so far observed that neither FD’s nor savings bank account is reliable to give inflation-beating returns, however Equity mutual funds have proved themselves best in this category.
Concluding Points
Short-term investment is far more goal-oriented and is best considered to finance definite expenses. Say if you are investing in debt fund for a vacation abroad after 2-3 years, then relax, the ticket prices and other things aren’t going to exceed your investment returns and all thanks to inflation in such a short period of time.
However, your big goals like retirement after 20-30 years, need to take into account the damages by inflation. For your big goals, you need to invest in an instrument that maintains the value of your investment ahead of inflation, thus you need to invest in Equity Mutual Funds.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).