Never Worry about Inflation again with these Tips

Arun Sharma October 10, 2019

Every individual who saves up extra money over time wants to know how to hedge against inflation. Inflation means “rise in the level of prices for goods and services”.. In other words inflation makes a hole in your pocket, as you end up paying more for things compare to what you were paying earlier.In India, inflation is measured on the basis of two price indices, wholesale price index (WPI) and consumer price index (CPI). WPI measures price rise at the level of seller or retailer who buy commodities in bulk or ‘wholesale prices’ while CPI measures inflation at the retail or consumer level. WPI is the major factor for determining the inflation for Indian economy.

Let’s take an example: A one hundred rupee note issued in 2010 still has the value of one hundred rupees even in 2018. However, due to inflation, prices have risen over the past 8 years. Let’s say that in 2010, the price of one kilo of rice was Rs. 30. As a result of inflation (and of course other reasons as well), the price today has risen to at least Rs. 80 per kilogram. That means 8 years ago with 100 rupees, one could have purchased 3 kilos of rice. But now with the same Rs. 100, one can purchase only 1 kilo of rice. Even if the face value of the money is same, its purchasing power has clearly decreased.In India, annual consumer inflation declined to 3.69 percent in August of 2018 from 4.17 percent in July. Lowest since October of 2017, mainly due to a steep slowdown in food cost. Inflation Rate in India averaged 6.49 percent from 2012 to 2018, reaching an all time high of 12 percent in November 2013 and a record low of 1.55 percent in June of 2017.

Effects of Inflation on Consumers:

1. Fixed Income Earners: Fixed salaried employees really lose out from inflation because their purchasing power decreases with rising market prices.2. Money Savers: They will lose out as the original value of what they saved decreases3. Creditors and Debtors: Borrowers actually gain from inflation. If you borrowed Rs. 100 from a lender with an interest rate of 5% but the inflation rate is 6%, and when payback the amount to lender the value of the money decreases by 1%. So lender loses 1% of the value of your money. However, the interest rates are usually not lower than inflation.

Ways to protect yourself against inflation

1. Invest in Mutual Funds: From last 10 years, the Nifty has returned 16% a year compared to the 7% average inflation rate. Investing in mutual funds over a long period is one of the best ways to stay ahead of inflation. One can invest either directly or through mutual funds. For new investors, it is advisable to invest in financial market through mutual funds, as they are managed by experts.2. Invest in Real Estate and Gold: Gold is considered an ideal tool to hedge against inflation. Experts say real estate is also a good option if one can initially afford to invest big amount. However, only a small portion of your portfolio should be allocated to these investment options3. Invest in Stocks Paying Good Dividends: The substantial return coming from companies, dividends help you keep up with the rising inflation rates. Since the interests offered by the banking institutions are normally way lesser than the inflation rates, therefore this is a rather profiting deal4. Diversify Your Assets Geographically: Allocation of assets globally will help you make your portfolio more established and less susceptible to inflation. One can look at an opportunity is to diversify globally. This will make your portfolio more stable and less vulnerable to domestic volatility and inflation.

Inflation affects every citizen of the country, rich or poor, it is a crucial determinant of a country’s economic and social progress. So far as wealth redistributions are concerned, consumers and fixed income groups are at a loss because the purchasing power decreases. You can always prepare yourselves from the storm by investing time in proper financial planning and building a strong investment portfolio.

Arun Sharma

October 10, 2019

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