Inflation all the way!

I went to the saloon last Sunday for a routine haircut and the guy charged me 20% more for the same hair cut compared to last month. Went in to buy some craft articles for my wife and the price had gone up 25% . I need not talk much about the vegetable process and souring auto fares ( minimum fare of Rs 30 charged for a short distance is a thing of the past now).

Returns that beat inflation and taxes

I was going through an interesting statistic in Times of India today- 6th may 2008. The article says

If you has invested Rs 10,000 a year ago in any of the following today it will be worth

1) Nifty -12595 ( ideasmoney comments--- this is roughly 26%. It manages to beat current inflation rate . effective return 26%-7.5%= 18.5%, no tax as long term capital gains rate for equity is 0%. , dividends that you would have got are a bonus!!)

2) Sensex -12502 ( ideasmoney comments--- this is roughly 25%. It manages to beat current inflation rate . effective return 25%-7.5%= 17.5%, no tax as long term capital gains rate for equity is 0%. , dividends that you would have got are a bonus!!)

3) Gold -12430 ( ideasmoney comments--- this is roughly 24%. It manages to beat current inflation rate . effective return 24%-7.5%= 16.5%, Applicable taxes would also shove off your returns and bring it down from 16.5%)

4) Silver -11802 ( ideasmoney comments--- this is roughly 12%. It manages to beat current inflation rate . effective return 12%-7.5%= 4.5%, Applicable taxes would also shove off your returns and bring it down from 4.5%)

4) Post office ( or other FD) -10850 ( erroneously given as 10625 in TOI???) ( ideasmoney comments--- this is roughly 8.5%. It manages to beat current inflation rate by a small margin. effective return 8.5%-7.5%= 1%, Applicable taxes would also shove off your returns and bring it down from 1%. If you are in highest income tax bracket your return would be effectively 0.7%!!)

So, when you plan to invest plan to beat inflation and taxes. For this reason, don't put all your eggs in one basket!!.

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Inflation and you

The increasing rates of daily needs are likely to eat up what you consider as savings today in about 20 years. Your investments that attract fixed return would definitely be affected even by a reasonable inflation rate. In the long term, the returns that are considered to be ideal presently will turn out to be too less due to inflation. So, it is essential to invest in assets that will beat inflation. Preference can be given to stocks which have prospects of higher rise in value as compared to securities offering fixed returns.

The changes in living standard will also influence investments. Although gold is a good option, investment in stocks are ideal in the long run. An ideal blend of regular investment in debt securities and equities will definitely generate wealth irrespective of the inflation rate.

Compare Mysore Palace and a Two Bedroom flat

Mysore Palace was built between 1897 and 1912 at an outlay of around Rs. 42 Lakhs.

You will have to strive hard to get a two bedroom flat in Bangalore today for the same amount (Just four walls).

The Compounding effect of Inflation does such wonders!!!!@. So, whenever we do investment planning (Say a financial plan for the future like child’s education or retirement planning) it is very important to factor inflation into our plans. If we don’t do this, the whole plan can go for a toss.

We must also choose investment avenues that can grow ahead of inflation. Overall return of the portfolio must at least keep pace with inflation if not outpace it.

Always have ‘Inflation’ in mind when you invest or plan for the future.


Presentation on Inflation

NSC/ FD VS Equity MF Comparison table

A self explanatory table of comparison between investments

( Fixed Deposit/ National Savings Certificate Vs Diversified Mutual Fund)

		Amount in Rs
Investment	F.D./ NSC	Diversified Equity MF
Amount	10000	10000
Period	6 years	6 years
Maturity Value	15868.74	29859.84
Tax on Income/ Capital gains	1573.68	0
Inflation	4185.19	4185.19
Value of Investment after 5 Years	10109.87	25674.65
(post tax post inflation)
Difference	(15564.78)
Rates	Per annum
Inflation	6%
Rate of Interest on F.D./NSC	8%
Rate of Return on MF	20%***	(Last five years average 40%)
Income Tax rate	30%

***This post was published originally in Dec 2006 ( When the global equities were moving to a  peak ). In those times,an average equity mutual fund had annualized returns over 40% for five years ( 2001-2006). In 2013, the average annualized return for equity funds stand at around 5 % (considering the last five year period 2008-13).

So, Please know your facts and risks associated well before investing. Blind extrapolation of the past would lead to great failures.

Also read, http://ideasmoney.blogspot.in/2013/09/fixed-deposits-or-debt-funds.html

Few slides from a Presentation on Investment ...which I happened to see.