Imagine, you are in the year 1996, and you go for a cup of coffee to a cafe. The coffee, back then would have cost only Rs 7.
Coming back to 2014, the same coffee will now cost Rs 80, in an outlet not even too upscale! This is an increase of 14% every year on just a cup of coffee – this is inflation working against you. Value of Re 1 in 1996 was just Rs 0.08 in 2014 and is even lesser in 2015. In 2030, the same cup of coffee might cost you almost Rs. 600 (if prices increase at 14% every year)!
Note that it’s not just your coffee that is scaling up, inflation or in simpler terms price rise, applies to everything we buy and consume. The inflation rate in India has been on an average, around 7% historically. This has been lower in the recent past with 4%-5% being seen in 2019.
In most cases, like in education sector, the percentage rise in prices has been in double figures annually. In other words, your money will keep becoming poorer, though you might be getting richer, theoretically.
Another example; today, the cost of a week’s worth of vegetables is about Rs. 300. In 2020, you might have to pay about Rs. 600 for the same vegetables. Now as the cost of vegetables goes up, Food & Beverage outlets will charge more for finished products.
Would you be willing to pay Rs. 1000 for a simple meal, in an average restaurant? You might not have a choice at all! If you are not prepared for this future, then you better start finding a solution to it now.
What can you do to beat inflation and prepare for a future where even a "cheap" car costs Rs 10 Lakh minimum?
If you think that your regular FD (Fixed Deposit), or RD (Recurring Deposit), is going to suffice, then you need to think again. With most debt instruments, the maximum rate of return is about 7%-8%.
As a result, if Rs. 100 becomes Rs. 106 (don’t forget the tax you will have to pay on the interest earned), your money becomes: – Rs. 2, taking into account inflation too. So, you just became poorer by Rs. 2. Increase these numbers to a more practical amount and you will have something to worry about.
Investing in property will not really help because property rates are on a downtrend due to overpricing. Keep in mind the fact that selling property is a herculean task because even if your property becomes handsomely valuable, how many people can actually afford to buy your property?
After all even property prices must bow to the rules of supply and demand. It is also difficult to source such a huge corpus required to purchase property.
What actually works?
Equity is the one asset class that has fought almost every other asset class over the long term. For a country like India, equity is the most promising investment vehicle. Considering equity investing has made as well as broken individuals and organizations, how can the average investor do it right, and without going broke?
Equity mutual funds, with their expertly managed approach and built in diversification, will give the investor an edge over inflation as they have historically given 14% returns on an average over the long term. The current return assumption is 12% for the future in line with lower inflation.
Higher than inflation returns means that their money will keep increasing in value over time. This is perhaps the only reasonable way any investor can hope to afford coffee, 20 years in the future.
This 15 part series helps you identify and complete a single task every day for 15 days to take charge of your financial life. Over these 15 tasks, you will know more about your money and how to make it work harder while having to do less work and also worry less.