Inflation and its Effects on Investments
Effect of Inflation on your investing
Inflation is a financial term.
The effect of inflation is the prices of everything going up over the years.
Example - Our grandfather is to say that in one rupee he was doing shopping for whole month and now days you require minimum RS 10000 for your entire month. This rising prices year after year is called effect of Inflation.
And this is reason the earning of common man has also increased from Rs 50 to 100 in older days to Rs 5000 to 10000.
In other words inflation reduces the price of money, the movie ticket which was available for 50 paisa in olden days now have become RS 50.
Every week on Friday government declares rate of Inflation. (In current policy they have changed it to every month)
Suppose if price of one kg sugar is Rs.100 this year and next year the price becomes approximately Rs.106 then the rate of inflation is 6%.
What is the rate of return?
The rate of return is nothing but how much you earn on your investment.
For example - If you invest Rs.500 in stock market and after one year you make profit of RS 100 then your rate of return is 20%.
So, when you make an investment, make sure that your rate of return on the investment is higher than the rate of inflation.
What is the Conclusion?
If you invest Rs.100 in the market today and you make money at a 5% "rate of return" in one year then you will have Rs.105. But if the rate of inflation remains at 7%, then an item costing today for Rs.100 will cost Rs.107 a year from now.
So what you can buy with today’s Rs.100 will be available for Rs.107 a year from now but your earning is Rs 106. So the conclusion is you are loosing the money.
From the above explanation you may be understood that how slowly inflation eats into your money.
So what to conclude from this Inflation
1) If you are seeking good wealthy future then it is not advisable to keep your money in safe locker but do safe investing because if you just keep putting your money in locker then it will loose its value as year passes.
For example if you keep Rs.5000 in your locker today and you keep it there for 15 years or 20 years then there are quit possibilities that your RS 5000 could become worth Rs. 500.
2) If it is getting difficult for you to decide where to invest then you can put in at least in bank and let it grow by earning interest year after year.
3) When investing, you have to make sure that the rate of return on your investment is higher than the rate of inflation though inflation control is not in your hand.
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