Over the last few years, Inflation has been a cause of worry for the common man as the rate of return that people have been earning on their savings or fixed deposit account (post-tax) has failed to beat the rate of inflation.
The average rate of annual inflation in 2012 as measured by the consumer price index was 9.3 percent. This implies that even after adding the post-tax interest (tax calculated @30 percent) you accumulate on your fixed deposit principal amount, the value of goods that you may be able to purchase one year forward will be less than what you can purchase today with your principal investment.
In a nutshell, an environment of high inflation is killing your purchasing power. With every passing year, the purchasing power is further affected as the money in your savings gets decayed.
The class of people who are most affected is the retirees, who largely rely on the interest on their savings to meet the rising daily living expenses. The only way to build financial security and protect your affordability in an era of inflation is making your money work harder.
We all know inflation is a macroeconomic phenomenon which is out of our direct control. But what we can certainly control is the kind of investment avenues that we choose to put our money in.
It only requires you to sit back and rethink about your investment strategy. A well-planned investment approach can help you build your savings grow faster than inflation. This means that the money you park today in the right investment avenue would allow you to purchase a larger value of goods or services tomorrow.
However, while planning your investments it is important that you give due importance to the potential impact of inflation on your savings. Predicting inflation rate may not be possible, but what we can certainly assume in our calculation is how inflation has shaped in the past years and based on that we should make a reasonable assumption for the inflation rate going forward.
There are varieties of investment plans that can help you achieve your financial objectives. Among the traditional investment plans, one can opt for endowment plans, Pension plans or money back plans.
Besides, you can also invest in unit-linked insurance plans that offer comparatively higher returns on investment, but they involve high-Risk factor. Depending upon your risk-reward profile, you may choose a specific plan.
The different investment plans have varied mandates and could deploy your money in varied asset classes. These plans may purely invest in equity or debt or a mix of both. We all know equities have proven to be a great hedge against inflation in the Long Term and if you think you have the risk appetite you can go for a pure equity investment plan.
If you would like to balance, there are investment plans which invest in a mix of debt and equity as well. You may also do an online comparison and choose the best investment plan
To live in this era of inflation, it is important to translate your savings into investments and it is best to start as early as possible. For sound financial planning, you can discuss your current income/expenses and financial goals with your financial advisor. Accordingly, your advisor will suggest you the best investment plan.