Your Money: Three tips to ensure your investments beat inflation

August 25, 2021 12:45 AM

The earlier you start investing your money, the greater the possibility of earning more and reaching your goals faster.

Equity mutual funds tend to generate better returns over a period of time, hence the earlier you start investing, the more potential your money has to grow.

By Sorbh Gupta

India’s retail inflation, measured by the Consumer Price Index (CPI), was higher than Reserve Bank of India (RBI’s) threshold for two consecutive months. In July, the CPI inflation eased relatively to 5.59% year-on-year. However, this time, the retail inflation might not be transitory and be more structural. In tandem, RBI increased the CPI forecast from 5.1% to 5.7% for FY22.

So, what are the investment principles retail investors need to follow to keep a check on inflation?

Focus on the real return
Inflation erodes the pricing power of your investments. So, to simply put, real return = return – inflation. It is because inflation . As a result, traditional investments like fixed deposits (FDs) have not kept pace with inflation. For instance, when your bank savings account gives a nominal return of 4%, the real return is negative as average inflation has been at 6%, significantly higher than the 4% bank yield on savings accounts.

Start early & invest consistently
The earlier you start investing your money, the greater the possibility of earning more and reaching your goals faster. Starting early and investing consistently gives you the flexibility to invest with a small amount and reach your goals faster. Equity mutual funds tend to generate better returns over a period of time, hence the earlier you start investing, the more potential your money has to grow.

Time in the market makes a huge difference over timing the market. This means the longer you keep your money uninterrupted; it has the potential to provide long-term risk-adjusted returns. It also saves you from the hassle of predicting the market and trying to analyze and assess the macro-economic indicators such as inflation.

Let’s see an example of two investors: Sharma and Kotian, who want to start planning for their investment at different ages, 45 years and 30 years, respectively. For example, Sharma started investing Rs 10,000 a month in a SIP at the age of 45. He invested 15 years till he was 60 years and the total amount invested is Rs 18 lakh.

On the other hand, Kotian started investing Rs 5,000 a month in a SIP when he was 30 years old. He invested for 30 years till he was 60 years of age and the total amount invested is Rs 18 lakh. The illustration assumes a 10% rate of return for a monthly SIP. So, Sharma’s total corpus is Rs 41,79,243 and Rs Kotian’s total corpus is Rs 1,13,96,627. So, the investor who started early at age 30 can accumulate more than double the size as compared with the investor who is aged 45 years. This illustrates the power of compounding through your returns reinvested and adding to your corpus over the long term.

Align portfolio with your risk profile
Consider your risk appetite, risk tolerance, and risk capacity carefully. When you begin your mutual fund journey, you find that a solution that has worked for you may not work for another investor. This is because different investors have different risk profiles. Risk capacity is your ability to take financial risks based on age, income, etc. On the other hand, risk tolerance refers to an investor’s willingness to take or ‘tolerate’ risks or the level of volatility in returns one is ready to deal with. Risk appetite refers to the maximum amount of risk that you are willing to take as an investor. You have to be well-acquainted with your goals and the timeframe to assess the risk level you are comfortable with taking on.

The writer is fund manager, Equity, Quantum AMC

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