Rs 1 crore sounds like a huge amount. You might be thinking that if you accumulate Rs 1 crore after 25 years from your investments, you will be completely financially secure. But will it be like that?
The problem is inflation. Inflation reduces the power of our money a little bit every year. The thing that is available for Rs 1 lakh today, the same thing will probably be available for Rs 2-3 lakh after 15-20 years. In such a situation, if the inflation rate remains 5%, then how much will today’s Rs 1 crore be worth in 2050?
How can inflation weaken your savings?
If you are investing in savings schemes like FD, PPF, NPS or EPF, then you also have to see whether their returns can beat inflation or not. Inflation rate in India has been between 4% to 6% in the last few years and if inflation continues to grow at an average rate of 5% for the next 25 years, then the real value of your current savings will gradually decrease.
If you get Rs 1 crore after 25 years, what will be its purchasing power? Let us also remember that when we talk about returns given by a particular savings instrument, we should also keep in mind the actual inflation that will keep eroding the value of your savings over the investment period.
The real value of your money between investment and inflation
If you have set a target of earning Rs 1 crore after 25 years, then it is important to see which fixed return investment options can give some protection against inflation?
Fixed Deposit (FD) – Estimated Return: 6.5%
FD is considered a safe investment, but its return is close to inflation. If you are getting a return of 6.5% and inflation remains at 5%, then in reality your wealth is growing by only 1.5% per year. But let us first tell you how much you need to invest now to reach a corpus of Rs 1 crore in 25 years. To get a corpus of Rs 1 crore by 2025, you need to invest in 2025 a sum of Rs 20 lakh, on which an annual return of 6.5% can get you to your goal.
Here it must be noted that the maximum tenure of an FD plan can not be more than 10 years, which means you need to reinvest your maturity amount twice to remain invested for 25 years.
Also read: Fixed Deposit: Short term FDs offering more than 7% – Check latest rates
Public Provident Fund (PPF) – Estimated Return: 7.1%
Investing in PPF gives you slightly better returns, but still, it does not give a huge margin over inflation. If you want to get Rs 1 crore after 25 years, then you need to invest per year Rs 1,46,000.
Employees Provident Fund (EPF) – Estimated Return: 8.25%
EPF is safe, but its return at 8.25% is also not very high. If inflation remains at 5%, it will affect your total savings.
If you want to retire with a corpus of Rs 1 crore in 25 years from now, you need to invest per month Rs 7,080 as an employee contribution and Rs 2,165 will go as employer’s contribution. To become eligible for this PF contributions, you need to have your salary (basic + DA) at Rs 59,000 per month, on which 12% and 3.67% deductions will ensure you reach a corpus of Rs 1 crore in 25 years from now.
What will be the value of Rs 1 crore after 25 years?
So, from the above examples we understood that though these investment instruments give competitive returns, their actual yields, after adjusting inflation, are negligible. Now let us understand from a calculation the value of Rs 1 crore after 25 years considering the average inflation at 5% over these years.
So the real value of Rs 1 crore will be about Rs 29.36 lakh after 25 years if inflation remains at 5% over this period.
So what to do? Savings will be beneficial only with the right planning
It is important to understand that just saving Rs 1 crore is not enough, but it is equally important to save its real value. For this, choose such investment options, which give better returns than inflation.
Focus on growth, not just savings. Also consider options like stock market, mutual funds, and NPS.
Do the right asset allocation for the long term. Do not invest all the money in one place, but make a balance in options like FD, PPF, NPS, and equity.
Do not ignore inflation. While deciding to invest, understand not only the return but also the impact of inflation.
Also read: SIP Calculator: THIS SBI mutual fund completes 10 years! Rs 10,000 SIP turns into Rs 27.67 lakh
Conclusion:
The amount of Rs 1 crore may seem big today, but if inflation continues, then its real value will be much less in 2050. Only with the right planning and smart investments can you ensure that your savings remain as strong in the future.