How to generate inflation-beating high returns to achieve your financial goals?

Inflation reduces the purchasing power of your money over time. Hence, you need to invest in equity mutual funds and other financial products that can help you combat the effect of inflation on your savings.

inflation proof investment

In 2022, inflation made headlines not just in India but across the world. In 2022, you must have experienced an increase in the cost of living in almost every area. To combat inflation, central banks across the globe, including India, started increasing interest rates. In 2023, inflation has slowly started trending down; however, it is still not within the tolerance levels of many central banks. Hence, central banks continue to hike interest rates, making home loans and all other loans costlier. In this article, we will understand how high inflation impacts your cost of living and what you can do to mitigate it.

What is inflation?

Inflation is the general increase in the price of goods and services over a period of time. Inflation can be measured on a month-on-month basis or quarterly, half-yearly, yearly, etc. The government releases the Consumer Price Index (CPI) every month. For example, the CPI for December 2022 was 5.50%. It increased from 5.41% in November 2022 (month-on-month) but declined from 5.56% in December 2021 (year-on-year). In simple terms, in December 2022, the cost of living went up compared to November 2022 (m-o-m) but went down compared to December 2021 (y-o-y).

Also ReadPersonal Inflation Vs CPI Inflation: What's The Difference?

Effect of inflation

Let us understand the effects of inflation with an example. Let us assume your child’s current school fee is Rs. 50,000/year. You have accumulated Rs. 50,000 for next year and kept the cash at home. After one year, the school hikes the fee by 10% to Rs. 55,000. In other words, education inflation has gone up by 10% compared to last year.

In this case, you will have to put Rs. 5,000 from your pocket to pay the Rs. 55,000 school fees. So, your money lost value due to inflation because you kept it in the form of cash.

Impact of inflation on savings

Let us continue with the earlier example. Instead of keeping the Rs. 50,000 cash at home, let us assume that you deposited the money in your savings account that pays 4% p.a. interest. After 1 year, you will have Rs. 52,000. You will still have to put Rs. 3,000 from your pocket to pay the Rs. 55,000 school fees.

If you had invested the Rs. 50,000 in a fixed deposit that paid 7% interest p.a., you would have got Rs. 53,500 after 1 year. That still leaves you with a shortfall of Rs. 1,500 that you will have to put from your pocket to pay the Rs. 55,000 school fees.

Also Read: What Is Lifestyle Inflation? Four Tips To Avoid Lifestyle Inflation

How to protect your savings from inflation?
In the above section, we saw how the returns earned from a savings account and fixed deposit are not able to protect the investor’s savings from the high inflation rate. To do that, you have to invest your savings in a manner that the returns are higher than the inflation rate. Equity investments have the potential to give high returns that can beat inflation.

For example, as of 31st January 2023, the Nifty 50 Index has given price returns of 9.88% CAGR in the last 5 years and 11.11% CAGR since its inception. These returns are good enough the beat the CPI or the general inflation rate.

Returns of indices

Returns of indices

Note: The above returns are as of 31st January 2023. The above are price returns.

(Source: Nifty 50, Nifty Midcap 150, and Nifty Smallcap 250 indices factsheets on the NSE website)

You can get exposure to the above indices either through active or passive mutual fund schemes. Passive schemes include Exchange-traded Funds (ETFs) and index funds. Equity mutual funds can give you the benefit of compounding, leading to wealth creation in the long run.

Also ReadShould You Resort To Gold During Inflation?

Asset allocation

It is recommended that you follow appropriate asset allocation for your investments. When investing towards financial goals, you should diversify your portfolio among domestic equities, international equities, fixed income, gold, etc. A well-diversified portfolio will give you good risk-adjusted returns that can beat inflation in the long run.

Actionable insights

  1. Keep an eye on the current inflation rate, past trends and the future outlook.
  2. When investing, always consider financial products that can give inflation-beating returns.
  3. Follow asset allocation. It can give risk-adjusted returns that can beat inflation in the long run.


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