{"id":1572,"date":"2023-08-03T15:27:36","date_gmt":"2023-08-03T09:57:36","guid":{"rendered":"https:\/\/savart.com\/blog\/?p=1572"},"modified":"2023-08-18T13:23:24","modified_gmt":"2023-08-18T07:53:24","slug":"how-inflation-eats-away-into-returns","status":"publish","type":"post","link":"https:\/\/savart.com\/blog\/how-inflation-eats-away-into-returns\/","title":{"rendered":"How Inflation Eats Away into Returns"},"content":{"rendered":"\n

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When you think about investments you are always guided by the inherent returns. When choosing to invest your hard-earned money you primarily think about the returns the instrument would yield and then consider its risk profile. However, when considering returns on your investments, do you ever consider whether the returns are real returns or nominal returns?<\/p>\n\n\n\n

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Stumped? Most of you are guided by nominal returns and don\u2019t factor in the inflation rate. Since you get returns after a specified tenure, shouldn\u2019t the returns be inflation adjusted?<\/p>\n<\/div><\/div>\n\n\n\n

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Inflation, in economic terms, means the general increase in the price of goods and services. Money loses its purchasing power due to inflation. As prices increase, more money is required to buy the same goods and services. Even in the case of investments, inflation leaves its mark. Do you know how inflation affects your investments and eats it away? Let\u2019s understand with an example:<\/p>\n\n\n\n

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Suppose you need INR 110 for buying a product the next year and you only have INR 100 today. So, you invest INR 100 in an avenue which gives you a return of 10% every year thinking that you would get INR 110 in the next year to buy the product. However, the inflation in the same year is, say, 6%. The product which cost INR 110 this year would cost INR 116.60 in the next year. However, your investment would only grow to INR 110. You would still be short on cash to buy the product. Though the return rate is 10%, the real return which you would be earning would be \u2013<\/p>\n\n\n\n

{(1.10\/1.06) \u2013 1} * 100 = 3.77% only<\/p>\n\n\n\n

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Thus, inflation causes your investment return to shrinking as it reduces the value of money. You are, therefore, not able to completely meet your financial obligations for which you invested in the first place.<\/p>\n\n\n\n

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What can you do?<\/strong><\/h2>\n\n\n\n

You cannot stop inflation. Inflation is an economic phenomenon which would be relevant in the market. What you can, however, do, is to invest in avenues which give you inflation adjusted returns. Avenues which give you fixed returns should not be chosen even though the returns are guaranteed. Since the returns would be fixed, they would be stagnant and not increase to factor in inflation. Inflation would, thus, eat into such returns and the real returns would be very low. You should, therefore, invest in avenues where the returns factor in the movements of inflation. Some such avenues include the following \u2013<\/p>\n\n\n\n

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