Fighting Inflation

One common mistake we make while planning for investment is not adjusting inflation against the returns. In general inflation means a rise in the level of prices. The price we paid for buying one kilo onion in 2006 was quite less as compared in 2008. Inflation reduces the power of money as the medium of exchange. If we invest in any financial instrument which gives us 8% returns and the inflation increases by 3%, then by roughly adjusting the rate of inflation the net result would only be 5%. Inflation can hugely impact our long term savings. Any x amount 20 years hence might look very big now but its actual value will definitely be far less if we take inflation into consideration. Apart from that we have to pay the tax on the maturity value of our investment thereby reducing the value of our investment further. We should invest in instruments which will beat the inflation and will be tax free. Equities are the best to beat inflation. Though they have an element of risk, the returns offered by the equities are far the best as compared to other avenues of investment. One important thing to remember is that we should not put the entire money in equities but only a portion of our savings and that too at regular intervals over a longer period of time. Inflation not only erodes your interest but your principal amount too. Before chalking out any financial plan we should always calculate the inflation rate. Inflation plays an important part in deciding investments so do not forget this vital factor while deciding to invest.