Jigar M. Patel
International Tax Attorney
As someone once rightly remarked, “Inflation is when you pay fifty rupees for the twenty rupees haircut you used to get for ten rupees when you had hair.” When the value of the rupee erodes over the years due to inflation, the same quantum of money now fetches you fewer goods or services.
Inflation may appear tame in the short term, but its effects sneak up on you after a long period of time. Just imagine what can happen with the purchasing power of the rupee eroding with the time! 15 years from now, if inflation averages the current annual rate of around 5.7% per annum, you will have lost 57% of the purchasing power of your capital. Thus, to maintain a lifestyle equivalent to Rs.1,00,000 as of today, after 15 years you will need a corresponding amount of around Rs.2,30,000.
Along with inflation, you must also account for the impact of income tax which eats away your actual earnings. Say for example, you are earning 7% interest per annum on your bank deposit. If you are a taxpayer in the bracket of 31.2%, your post-tax rate of interest works out to 4.82% and considering the inflation rate of 5.7%, your effective capital growth is in the negative (-0.88%).
So how do you insure yourself from inflation for the long term? Here are some smart investment strategies that can be practiced to beat inflation:
#1 Buy your House in Time
Buying a home is probably one of the single biggest investments you make in your lifetime. The sooner you make the decision, the better. If you buy the house you need in time, you are automatically hedged against inflation. A house costing Rs.50 lakhs today could have been very well purchased by you 10 years ago for only Rs.20 lakhs. If you had then parked this money into a deposit fetching 6% interest per annum (net of tax), your investment would have merely become Rs.35.82 lakhs in 10 years and you would now be required to dish out an extra Rs.14.18 lakhs just for delaying your decision.
#2 Diversify into Equities and Mutual Funds
If you are a serious investor, stocks and equities should hold a great appeal from the viewpoint of their ability to effectively counter inflation and give you superior real returns over the long-term vis-à-vis any other asset class.
#3 Investing in Bullion
How about Bullion? Gold has always earned high respect as a ‘crisis hedge.’ You can invest in gold through avenues not just as bullion, coins or jewellery, but also through units of gold trading mutual funds or Sovereign Gold Bonds.
#4 Build your Earning Power
A strategic way to battle inflation is to keep your income stream going. Be part of an employment where salaries offered are sensitive to inflationary trends. If you own a business or profession, your comfort level should be higher since you can always raise rates, fees, prices along with the costs of operating your business or profession. The real squeeze of inflation is suffered by the fixed income earners, only dependent on investment income. If you fall in this category, you must become a smart investor reaping effective yields that can beat inflation.
#5 Plan your spending
This should be the simplest advice but may be the hardest to follow. Think twice before you buy anything. Or learn the art of smarter buying, so that you make the best bargains for your purchases by planning your time and place for the same.
