You Can Win Over Inflation

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The Diwali festival is around the corner and everyone is gearing up to celebrate the victory of good over evil. One such evil is inflation that erodes our purchasing power. In other words, it can damage the value of our hard-earned money year after year. Let us take an example of someone who is 30 years away from retirement. If we assume a 5 per cent inflation rate for 30 years and that his current annual expenditure is Rs 1,00,000, it will increase to over Rs 4,35,000 by the time he retires. Therefore, if he plans for Rs 1,00,000 per annum for his retirement, he would be having less than 25 per cent of what he would really require.

We all need to recognise the importance of defeating this evil called inflation. Once we do that, all our dreams of leading a comfortable retired life, providing the best education to our children, owning a comfortable house and having a few other things that could facilitate a particular lifestyle can become a reality. Needless to say, winning over this dangerous evil is not an easy task. However, if we plan our investment, invest in instruments that have the potential to beat inflation, and are willing to make a few sacrifices today to have a better tomorrow, it can be defeated. Remember, achieving this victory would require years of patience, planning and discipline. Here is what you need to do:

Plan Your Investments:

The first step towards achieving the positive real rate of returns i.e returns minus inflation is to have an investment plan in place. Though it can be quite challenging to develop a strategy that not only withstands the turmoil in different markets but also helps in achieving short-term as well as long-term investment objectives, one can achieve it by focusing on the correct asset allocation. The principles behind asset allocation are simple and they can help you control the risk, match your portfolio with specific financial goals and increase the predictability of returns. The asset allocation strategy can help you achieve realistic financial goals within the defined time frame and that too without losing sleep. Besides, one has to continuously work towards curbing one’s expenditure. By doing so, more money will be available for investments every month.

Make Equities An Integral Part Of Your Portfolio:

While commodities like gold provide an excellent hedge against inflation, one has to aim to beat inflation over the years. One of the asset classes that have the potential to beat inflation over the longer term is equities.

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However, investing in equities would mean taking higher risk as compared to some of the instruments that give pre-determined or stable returns. However, one can minimise the risk by investing only long-term funds in equities as well as by following a disciplined approach. For example, a disciplined approach can go a long way in building the retirement kitty large enough to have freedom from the retirement blues.

Invest In Tax Efficient Options To Beat Inflation:

Considering that inflation eats into a substantial part of returns over the years, tax efficiency of the investment options plays a crucial role in improving the real rate of return in the long run. While tax efficiency alone should not drive the investment strategy, it can make a substantial difference to your portfolio’s ultimate size. In other words, tax efficiency has to be an essential element of any investment plan along with portfolio mix, investment philosophy and management. While paying taxes when necessary is understandable, paying more taxes than necessary is not.

The ultimate objective of investing should be to fund your current and future requirements by maximising your returns in a manner consistent with your means, future needs and risk tolerance. The tax efficiency becomes even more important when one plans to achieve medium to long-term investment objectives like children’s education, buying a house and retirement planning.

Mutual funds are one of the most tax-efficient investment vehicles. Some of the strategies to ensure that your investments remain tax efficient are to minimize portfolio turnover and to analyse the tax consequences before rebalancing your portfolio. In other words, it is important to evaluate your investment options carefully and select those you will be comfortable owning for years. Remember, taking the time in the beginning would mean that you have more to keep in the end.