Countering inflation

Sep 20 2013, 09:16 IST
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SummaryA look at some of the investing options that could help you beat rising prices over the long term

Inflation poses one of the biggest challenges in the recent times to the common man in India. Not only does it result in an increase in the price of goods and services, but also affects your financial plan to a great extent.

Simply put, inflation refers to the rising cost of living due to an increase in price levels. This reduces your purchasing power and, as a result, you are able to buy less with the same amount of money compared to what you would have bought a decade or two ago. The value of your savings also goes down and you may not be able to achieve your financial goals. Let us understand this with an example:

Rahul wishes to send his son abroad for education when he turns 21, which is 15 years from now. He estimates the current cost of foreign education (including all ancillary expenses) at R12 lakh. Now, assuming that the cost of this education will increase by 8% every year (this is the inflation), the total cost at the end of 15 years will be a little over R38 lakh. Thus, Rahul should plan to save R38 lakh for his sons foreign education and not R10 lakh.

This is true for each of your financial goals be it retirement, childrens education, their marriage, vacation or medical expenses. Inflation can, thus, create havoc in your financial life if not dealt with properly.

What is the best way to deal with inflation when you plan your finances and goals? The obvious answer would be to choose investments that help you counter inflation in the form of higher returns. Lets have a brief look at a few such investment options:

Equity: Equities generally give the best returns over the long term, thus helping to effectively combat long-term inflation. You can invest in equities either directly through stocks, or take the mutual fund route. An experienced investor who understands the markets well and has the time and knowledge to deal with the volatilities can look at direct investing in stocks. This can give you higher returns, but also comes with higher risk.

On the other hand, a more conservative investor can choose to participate in equities indirectly, by investing through the mutual fund route. This lowers risk, but also gives you lower returns than direct investing. It is better to choose good funds that are diversified and have a

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