When policymakers talk about the economy, the one recurrent thing that comes up in all debates is “ inflation”. Now you may think that it is for the policymakers to break their heads over such matters as you are not impacted by it. But that is not true. The “aam aadmi” is the worst impacted by inflation. Let’s see how.
- What is inflation?
In financial parlance, when the general level of prices goes up, its called inflation. In India the key measure of inflation is CPI or consumer price index. Through CPI the cost of the consumption of a basket of goods over a certain period of time serves as an evaluation index of the cost of living of the economy. This basket includes things such as food, shelter, clothing, transport and the likes. CPI is looked at as a measure of inflation, because it is stable by nature and the basket constituents do not change So to consider an example, if the weighted average of this basket of goods in 2014 was 300 and in 2015 it is 306 the rate of inflation would be 3% in 2015.
Inflation is an important measure to keep track of as policymakers need to reallocate resources as per the inflationary numbers, but how are common people impacted by inflation? High inflation leads to a high rate of interest thus increasing the cost of borrowing for those willing to take a home loan or any other such product. For fixed income families in the lower income group, the sword of inflation can make a deep incision as the prices for daily utilities rises at a rapid rate, and the common man is unable to keep up with the pace.
- Inflation reduces the value of your investment
That’s not where the impact of high inflation ends. For those saving for the future, higher inflation’s spells trouble as well, as it poses a risk of the rise in cost for saving for any future goal such as owning a home, marriage, education of children and retirement. A common man mostly believes that his investments are “Safe” in fixed income securities, but what he does not realise that he is losing out substantially due to inflation. For example, if the rate of inflation is rising at 9% and Mr A is earning 6% in his savings account, he is oblivious to the fact that instead of becoming richer by 6%, as he believes he is, he is in fact getting poorer by 3%. His wages do not keep up with the rate in the increase of prices, and thus Mr A real cost of living goes up higher as a result of high inflation.
- Beating inflation with equities
However, the good news is that you can insulate yourself from the effects of inflation and yet earn good returns, by opting for systematic equity plans. At Beeline, we offer you plans where you can invest directly in equities systematically either in a fixed quantity of shares each month or a fixed amount to be invested in shares. The underlying principle and benefit of this method of investing is that you are protected from the stress of speculation thanks to rupee cost averaging. So in effect, you buy more stocks when the price is lower and lesser when the prices are high.
As the cost of your purchases in equities is averaged over several transactions, you are not only protected from the stress of timing the market but are also beating inflation effectively as equities have been the most efficient asset class to beat inflation over the long term. The trick however is to remain invested over the long term (at least five years) and diversify your investments across large, middle and small cap stocks.
To put things into perspective, consider this example. Over the last three years the average CPI has been 9.36 %. If you would have put your Rs 10,000 each month across a diversified portfolio of stocks, you would have earned approximately 12.5% on a conservative estimate over the past five years (considering the returns of the BSE Sensex). On the other hand, investment in a five year FD would have fetched you 9.30%. So effectively your real rate of return would have been -0.06%.
This should make it clear to you that what you have been gauging as a safe is actually giving you’re the poorest rate of returns, so make the switch to equities. We, at Beeline, can help you construct the ideal SEP (systematic equity plan) that will give you the required protection from inflation and fetch your superior returns over a period of time.