Why Inflation Quietly Rewrites Every Household Budget
Ask a parent what a movie ticket, a school notebook or a kilo of vegetables cost twenty years ago, and you will hear a tale of astonishing change. Anyone studying Gold ETF India schemes eventually asks how such products relate to this slow rise in prices, and even a passing glance at the HDFC gold ETF share price invites comparison with the cost of everyday life. Inflation is the invisible force behind many financial decisions, and understanding it helps you choose better.
How Inflation Works in Daily Life
Inflation is a steady increase in prices. While a low level of inflation will not really impact your monthly budget, over a period of ten or twelve years, it can really begin to add up. A household may find that they need almost twice as much to spend over the next decade as they do now to continue their lifestyle.
Education and health-related costs often rise faster than the general inflation rate. Therefore, when investing to pay for your child going to college, or your parents needing medical care you want to ensure that your investment is outperforming.
Why a fixed return may not be enough:
While fixed investments (such as those in a bank account) can give you security, the value of your investment is heavily affected by inflation. If the rate of return isn’t much higher than inflation, then you won’t really be gaining much. After tax is taken off you could actually lose out.
These are not necessarily bad investments to make; they can give you security and are predictable. However, if all of your investments are invested in these types then you may fall short of your long-term goals. A more secure way is to have a combination of different asset classes.
The Yellow Metal
Often, the domestic price of this metal has outperformed inflation over longer periods of time due to being influenced by the value of the rupee and global uncertainty. As the rupee falls in value, the local price often rises. This provides some security for investors in India.
However, this is very unpredictable. There have been times when the price has not kept up with inflation or has remained flat over several years. It’s not wise to expect this metal to always be a completely secure investment. It can be used, however, to help with balancing your portfolio, especially during periods of stress in equities or currencies.
A good strategy often includes:
Equity funds – to provide long term growth outperforming inflation.
Debt – provides security and predictable returns.
Some precious metal investment to help diversify.
An emergency fund – stored within liquid and secure investments.
Your age, goals and risk tolerance will dictate how you allocate your investments. Often people suggest that between five and fifteen percent of your investment should be put into precious metals. However you may wish to adjust this depending on your situation.
Understanding your own inflation:
The figures provided nationally will give an average of how much prices are increasing. However depending on your situation this may not be the case. A family with children in school, an elderly parent and a mortgage will have different costs to a young single professional. Write down the main costs in your household and calculate how much they have increased over the past five years.
This will help to understand what your goals are. If your household costs are increasing at a higher rate than the average then your investments need to work harder. You may also want to take a look at how much you’re spending on non essential items.
Investing
Investing in exchange listed units can be simple. Once you have a demat and trading account you can compare expense ratios, tracking error and volumes. Try to invest in regulated funds with transparency. Invest regularly to average your cost and try to use limit orders.
Avoid anything that says that you’ll always outperform inflation using a specific asset. Real investment involves risk and if someone is promising you that there isn’t any risk then be cautious. Check that your adviser is genuine using the regulator’s website.
Tax:
Returns may not be as high as you think after tax. Gains are taxed based on how long you’ve held the investment. These have been updated recently in the Union Budgets. Check what the current rules are and invest accordingly. Check your portfolio yearly to ensure that you’re getting a return that is keeping up with your personal inflation.
Conclusion
While we can’t avoid inflation, we can manage it. Understanding how it affects your costs, having a diversified portfolio with different asset classes and having a flexible strategy will help you. Taking small, steady and informed steps will help protect your purchasing power much better than trying to get the best return.
