What are the best ways to beat the high inflation in India?

Inflation is the rate at which the prices for goods and services in an economy increases over time. This rise in the prices can impact an individual at the fundamental level in many ways:

1. It can decrease the purchasing power of your money, meaning you can buy less with the same amount of money.

2. It can reduce the value of your savings and investments over time.

3. It can lead to higher prices for goods and services, making it more difficult for you to maintain your standard of living.

You can’t control the rise in prices of items that are essential for your livelihood. However, you can definitely safeguard your returns from inflation. For this, it is important to understand the concept of real returns. To put it in simple terms, real returns = nominal return – inflation

To understand how inflation affects returns in India, let's consider the average annual inflation rate for the past 10 years. India’s average annual inflation rate for the past 10 years (2012-2021) has been around 5.42% . This means that, on average, the cost of living in India has increased by 5.42% each year over the past decade. Suppose a traditional saving scheme is offering a 7% return. This is your nominal rate of return. If the inflation rate over the same period is 5.42%, the real rate of return on your investment would be:

Real rate of return = ((1 + nominal rate of return) / (1 + inflation rate)) - 1
= ((1 + 0.07) / (1 + 0.0542)) - 1
= 1.49%

After accounting for inflation, this means that your investment has only grown in real value by 1.49%. In other words, inflation has eaten away a significant portion of your investment returns. However, there are ways to mitigate the impact of inflation on your investments.

Invest in Equity and equity-based instruments: Historically, equity has been able to offer the scope of capital appreciation. The long-term average return of the CNX Nifty in the past 10 years is around 13.23% , which is significantly higher than the average annual inflation rate (5.42%) in the same period.

Inflation-indexed bonds- Named Inflation-Indexed National Savings Securities or IINSS, these bonds are issued by the government and are designed to provide investors with protection against inflation while providing a steady source of income . IINSS bonds are linked to the Consumer Price Index (CPI) and offer a fixed interest rate plus an additional rate adjusted for inflation. The interest rate is paid semi-annually and is calculated on the inflation-adjusted principal. The tenure of IINSS bonds is typically 10 years, and the minimum investment amount is Rs1,000. These bonds are available to both individual and institutional investors, and can be purchased through designated banks and post offices.

Gold: Gold has traditionally been seen as a hedge against inflation, and it can be an effective way to beat inflation. The price of gold tends to rise when inflation is high.
Past Performance may or may not sustain in future. The above calculations are based on assumed rate of return and for illustration purpose only to explain the concept and do not necessarily reflect the returns that may be delivered by the MF Schemes. Please seek an independent professional advice or consult your financial, tax and legal advisor for more details

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.