Inflation is retirement kryptonite- Here's how investing help!

25-year-old Joe earns a good wage, lives a comfortable life, saves up for retirement, and does everything that the system has taught him to do. However, what Joe doesn't realize is that his savings might not keep up with the rising cost of living, which is called Inflation, and the worth of his money is degrading in the savings account year after year.

Suppose your income is INR 100,000 and your monthly expenses are INR 60,000. Accordingly, you are "saving" INR 40,000.

Today, you have two choices.

• Conserve the funds in a savings account or at home.

• Purchase gold, land, stocks, mutual funds, PPFs, SIPs, and FDs, among other things.

If you save money in the first scenario by keeping it at home or in a savings account, what kind of return are you getting?

• No refunds if the cash is still in your locker.

If the funds are retained in savings accounts, the rate is approximately 3.5%.

The drawback of the aforementioned strategy is that inflation cannot be defeated. India's inflation rate is between 4% and 5%, thus if you are merely "saving" money, you will lose it.

For instance, if your average cost is Rs. 100, inflation will cause you to pay Rs. 104–105 next year. Only if the money is retained in cash do you still have Rs 100. You would have Rs 103.5 if it were placed in a savings account. As a result, you won't be able to spend the same amount as you did last year. This disparity would widen much more over time.

Saving is therefore a good thing, but you should make sure you can at least keep up with inflation.

So how to beat inflation?

By "investing" in financial products that offer returns greater than the rate of inflation. For instance, FDs are an investment because they have interest rates that are higher than inflation at roughly 7%. In this instance, 100 rupees will equal 107 rupees after a year. After inflation, that amount exceeds what you require. You're making more money as a result. Your investment is on the cautious side in the case of FD. It indicates that you have reduced your risk and will receive a set amount regardless of the state of the market. The 7% return is very low, which is the issue.

Additionally, FD interest is subject to taxation. In other words, if you pay 30% of your income in taxes, your effective return will be 4.9% or 70% of 7%. That hardly beats inflation, though. Your effective return would be 5.6% if you are under 20%. This after-tax return calculation is performed by very few persons.

How can you “invest” to get higher returns and save tax?

• PPF offers an approximately 8% return that is also tax-free. As a result, it is a far better investment than an FD. However, there is a lengthy lock-in time.

• Mutual funds are excellent choices for investments. The greater long-term return potential is the main justification. Over the long term, you can anticipate yearly returns of between 10% and 15%. Volatility is the sole issue. Your returns would vary according to the day-to-day market environment. However, building a strong portfolio of equity and debt funds over time can give you excellent returns with mutual funds. Long-term, even the tax from stock mutual funds is 10% more than the 1 lakh in profits. The after-tax return would be 12.6% if the yearly return were 14%.

• Another investment choice is stocks. The number of returns is unlimited. If the business fails, you can receive returns that are multiplied or you might lose your money. So stocks are a risk. Another issue is that the majority of stock investors in India do it ignorantly. As a result, the majority of them lose money as a result of greed. If you are unfamiliar with the stock market, I advise keeping away from it. Even though you are knowledgeable, I advise just making very small investments in direct stocks. Always check the basics before investing.

• In addition to the aforementioned investment choices, you can put a little amount into gold because it offers strong diversification. If you can locate a decent price, investing in real estate is also an excellent choice.

Conclusion

Savings cannot prevent inflation from reducing your purchasing power. Your money is secure, though. Investments often yield larger returns than inflation. The type of investment instrument, however, would affect the returns on investments.