How to Beat Inflation with Savings

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Take a trip down the memory lane and think of your favourite chocolate from your childhood. Picture yourself paying a meagre Rs. 10 to the store owner and taking home your large bar of chocolate.

Now, fast forward to the present day. If your favourite chocolate bar is still around, it probably (almost definitely) costs more than Rs. 10. And if, by some stroke of luck, it still costs the same, take a closer look at its size. It's almost certain to be smaller than what you had all those years ago, as a child.

In other words, back in the day, you could get a lot of chocolate for Rs. 1o. But today, for the same sum, you get a smaller chocolate. And it's not just chocolate. The same can be said for most other products and services.

Have you ever wondered why the cost of goods and services have risen over the years? The answer lies in inflation.

What is inflation?

In the simplest terms, the meaning of inflation is the rising costs of goods and services in the country. In other words, the value of the rupee decreases with time due to inflation. So, the amount of goods and services you can buy today with one rupee will be more than what you can buy a few years later.

The effect of inflation is felt in all walks of life. Right from your everyday shopping for groceries and provisions, to the cost of your children's education or the expenses needed to tackle a medical emergency – all of these will rise over the years. So, to keep up with the rising costs, you need to factor in inflation when you draw up an investment plan.

For instance, say your child wants to pursue engineering 5 years down the line. Today, the cost of an engineering course in a premier institute is around Rs. 10 lakhs. If you don't account for inflation, you will draw up a plan to save Rs. 10 lakhs in 5 years.

But by the time your child attains college-going age, the cost of the same course will go up to Rs. 13.5 lakhs (assuming an inflation rate of 6% per annum). Needless to say, you will not be financially prepared to pay this sum if you ignore inflation.

How does inflation affect your savings?

While expenses will increase on account of inflation, the value of money will fall at the rate of inflation. This essentially means that if something costs Rs. 1 lakh today, it will cost more a few years later. However, if you save Rs. 1 lakh today, a few years down the line, this sum will be worth less than Rs. 1 lakh.

To put it in a different way, the future value of your expenses will be higher than their present value, but the future value of your savings will be lower than their present value.

Let us draw up the numbers to better understand how inflation affects your savings and your expenses differently.

Year

Amount of expenses
(Inflated at the rate of 6% per annum)

Amount of savings
(Discounted at the rate of 6% per annum)

0

Rs. 1,00,000

Rs. 1,00,000

1

Rs. 1,06,000

Rs. 94,000

2

Rs. 1,12,360

Rs. 88,360

3

Rs. 1,19,102

Rs. 83,059

4

Rs. 1,26,248

Rs. 78,075

5

Rs. 1,33,823

Rs. 73,391


See how inflation boosts the costs but depletes the value of your savings? In order to ensure that your savings are inflation-proof, you need to choose investment options that have the ability to offer a hedge against inflation. Wondering what these options are? That's just what we're going to explore in the next section.

Ways to beat inflation

The simplest way to beat inflation is to choose savings or investment instruments that offer returns at a rate that exceeds the inflation rate. For instance, the CPI-based inflation rate in April 2022 stood at 7.79%.[1]

Given this information, you need to invest in assets or schemes that can deliver returns above 7.79%. To be on the safer side, you can choose investments that deliver 9% returns or higher. Let us take a look at some investment avenues that may deliver such returns.

  • Investing in stock market

    One of the most popular ways to beat inflation is investing in the stock market. Although it is among the most volatile investment options, the stock market has been known to deliver inflation-beating returns over the long term. For instance, between 2011 and 2021, the Nifty 50 gave a CAGR of 13.5%, while the Nifty Next 50 gave a CAGR of 16%[2].

    The key is to know what kind of stocks to add to your portfolio. One of the safest ways to invest in the stock market and take a shot at beating inflation is to build a portfolio that mimics any of the benchmark indices like Sensex or Nifty. Alternatively, you can choose to invest in fundamentally good large cap stocks that can deliver significant returns over the long term.

    There are many ways in which you can invest in the stock market. You can either choose to buy direct equity, or you can invest in equity mutual funds. All you need is a demat account to get started.

  • Investing in gold

    Gold is another investment option that has been a favourite among Indian investors for several years now. The yellow metal is famously considered as a safe haven asset, meaning that when the markets are bearish and the inflation is high, people generally turn to gold as a safe means to invest their money.

    Gold prices are also quite volatile, and they fluctuate on a daily basis. That said, gold has also given noteworthy returns over the long run in the past. For example, in the period from 2010 to 2019, the yellow metal appreciated by 134%[3].

    It is also not as risky as the stock market, making it a popular inflation-beating investment option for conservative investors too. You can invest in gold in any of the following ways –

    • Physical gold (gold coins, gold bars etc.)
    • Digital gold
    • Sovereign Gold Bonds (SGBs)
    • Gold mutual funds
    • Gold Exchange Traded Funds (ETFs)
  • Investing in real estate

    Along with gold, real estate has been another favourite investment option in India for several years now. Buying a house is more than just an investment to many families in India. It has long been a symbol of financial stability and an essential life goal for a vast majority of Indians. The good news is, depending on the location and the type of real estate you invest in, you could earn returns that beat inflation.

    As for the data, the average 10-year returns on real estate has come up to around 10%[4] . This may not seem very high in comparison with the stock market or gold, but there is another hidden benefit that real estate investments bring. Apart from the returns, they also give you more savings by eliminating rental expenses from your budget.

  • Investing in life insurance

    You may not have expected life insurance to be a part of a list of ways to beat inflation. But the fact remains that one particular kind of life insurance – Unit Linked Insurance Plans (ULIPs) – can offer market-linked returns.

    In ULIPs, you can invest in different ULIP funds like equity funds, debt funds or a mix of the two. Equity funds invest in the stock market, meaning that you can earn inflation-beating returns over the long term. Since ULIPs come with a lock-in period of 5 years, you can let your money grow over this term untouched. That said, it is advisable to remain invested throughout the policy term, so your capital can benefit from the long-term investment and remain unaffected by market volatility.

    Remaining invested also gives your loved ones the financial protection they need over the entire policy term. So, you can rest assured that in case something untoward happens to you, your family will not be financially challenged.

Conclusion

While these investment options do not guarantee inflation-beating returns, they certainly have the potential to help you save without being affected by the depleting value of money. That said, market-linked investment avenues also carry the inherent risk of losses. So, it is essential to balance your portfolio with some safer investment options like fixed deposits and savings life insurance plans that offer guaranteed5 returns.

A good portfolio should give you the right mix of guaranteed5 returns as well as inflation-beating returns. This way, you can get the benefit of capital appreciation as well as capital preservation. When you are younger, you can prioritise inflation-beating investments. But as you grow older, capital preservation should take priority.

[1] https://www.business-standard.com/article/economy-policy/retail-inflation-eases-to-7-04-in-may-but-remains-above-rbi-s-target-band-122061300744_1.html#:~:text=The%20Consumer%20Price%20Index%20(CPI,Office%20(NSO)%20on%20Monday.
[2] https://www.moneycontrol.com/news/business/personal-finance/nifty-50-or-nifty-next-50-heres-help-in-choosing-the-right-index-for-your-investments-7705291.html
[3] https://www.businesstoday.in/personal-finance/investment/story/gold-sensex-returns-years-bse-silver-241131-2019-12-31
[4] https://www.etmoney.com/blog/real-estate-vs-mutual-fund-which-is-a-better-investment/#:~:text=Whenever%20we%20talk%20about%20any,nine%20biggest%20cities%20in%20India.
5 Provided all due premiums are paid.
ADV/6/22-23/539

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