Inflation : Its a tool to measure the increase in prices. If inflation is 6% , it means on an average the prices have increased by 6% , means anything which had ciost of Rs 100 last year will cost 106 this year. (Its a average price and not exclusively for some item)
Considering inflation at 6% , the value of Rs 100 will go down to Rs 53.86 in 10 yrs and to 29.01 in 20 yrs .
Inorder to keep value of you money same , the absolute return earned must be greater then inflation.
Investing in Fixed Deposits just retains its value, but people feel that they get good returns upto 8.5 or 9.0% . There is a tax of 3.5% on your FD returns and then if you adjust inflation of 6% after that , you will realise that though your Rs 100 has become 109 in a year , you have to pay 3 or 3.5 tax on that , and then if you have Rs 106 after that, you can purchase the same thing which you could have purchased in Rs 100 a year ago.
Hence , FD don’t give returns in real sense , they just keep your buying power. (considering inflation + tax = return from FD)
Investing in GOLD is considered the best way to beat inflation. Historically Gold has always outperformed inflation.The worst thing one can do is to keep Cash in Bank account , which can be invested . Cash must only be kept to a limit which may fulfill your emergency needs (preferably 3 times of you salary). Any extra amount must be invested.
{ 10 comments… read them below or add one }
Hi Manish,
Do you think Gold, since it has 'always' outperformed inflation, is the safest investment option? How do you compare Gold to SIP MF?
@NKanani
Only in recent years , Gold has given so exceptional returns that people started seeing it as an investment option . However , the long term performance of gold has been limited to provide a kind of return which beats inflation and that would continue happening , for short term , no one can say anyuting .. but if you are planning to buy it today and keep it for long term like 15-20 yrs .. It has no match with SIP in mutual funds ..
Manish
dear manish,to beat inflation for a person aged 40 years who started invcesting recently what is the option? whether he should go for equity diversified mfs or balanced funds. please suggest.
@divakar39
For a person in his 40's , I would say Balanced Funds would be a nice thing , provided he needs to make close to 11-12% return in 10 yrs time frame , If his return needs to be close to 14-15% , Equity Funds would be better , but then he/she needs to take some risk on that .
Mixing PPF + Equity Diversified Funds would also give the same effect as Balanced funds .
Manish
Would you consider Real estate(excluding residential flats) as an inflation proof asset?.
Secondly, how about Silver as an hedge against inflation?. For last couple of years Silver has caught the fancy of many investor.
@Gurdial
Yes , definately .. Real estate returns are second highest in long run after equity . So it makes sense in long run .
Silver has been a better performer than GOLD in recent years , it can be an alternative to GOLD as investment .
Manish
Hi Manish Ji,
I wanted to invest in gold for approx 10 yrs. so cna u please suggest that wht should be the strategy for such an investment for 28 yrs old.
Thanx.
@Saurabh
Well .. Gold is too much hyped these days .. Not that I suspect its return potential for next decade . But I feel that Gold can deliver good returns for next couple of years , but over 10 yrs of time frame Its return would not be more than 10% CAGR (fingers crossed) .
But anyways .. The thing I can think of is to do a SIP on your own (invest per month on a fixed date) in Gold ETF’s . Another alternative would be to divide your investment in Gold ETF’s and Gold Mutual funds .
What ever you do , just remember these points
1. Gold can not beat Equity in long term (If it does , c0nsider it as a once in a cenury thing) .
2. Historically (100+ yrs) GOLD returns have matched the Inflation rate … So do you want to second guess that for next 10 yrs ? sure you can and you should if you have confidence and appropriate reason , Do you ?
3. Do not put more than 10% (max) in GOLD as an investment . GOLD is a hedging mechanism generally .
Tell me !! .
Manish
Manish,
I am a new reader. I have read most of your articles and learnt a lot. Your articles are really awesome. However
a) In most of the articles you have assumed equity growth of 15%. In such a case, NIFTY has to reach 20,000 by 2020. Really will that be the case?
b) Inflation is something related to demand/supply within India. So it might be very high in coming years. But equity as a whole is dependent on the entire world. What if inflation goes up high and market stays in the current range for next 4 to 5 years? This is because last year during recession, prices of basic commodities decreased in USA where in it increased highly in India. In general is there a relation between Indian Sensex and inflation?
c) As per my understanding, all countries are living on lending money. Over past 10 years this was the case and this brought the economy growth everywhere. But now this has maxed out and the growth may not be the way it is in past 10 years. What is your idea on this?
Phani
a) 15% will not come by just buying and holding , Nifty at 20000 in 2020 may not happen . 15% return will be because its an assumption that you will make sure portfolio rebalancing is happening and you keep churning portfolio atleast in 1-2 yr to make sure you throw out junk and buy new funds which are better . A person who just buying equity and sits idle assuming that he will get 15% will be fool . Its not going to happen . Also better thing would be to assume 12-13% instead of 15% . 15% is on aggresive side .
b) I would say inflation and Index are correlated but both of them are dependent on another third thing which is how economy is moving .
c) Yes , the growth in next set of 15-20 yrs will be very different from last 15-20 yrs , in immediate term like 10-15% i see good growth because still india is on its way to become a developed nation and we have so much to grow .
Manish
Manish
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