The first thought that strikes – How to tackle this Goliath? Many in the investor community wonder to what extend the inflation can affect the investments and in turn their present and future.

What is Inflation?

Inflation is a word related to economics. Basically it is the increase in prices of goods and services over a period of time. As an investor, you should know how inflation affects you. A decade back watching a movie would have taken Rs 20 – 30 from your pockets. However, now the same ticket would cost around Rs 100 – 150. Take the example of any commodity which you use daily and compare today’s prices with the prices 5 years back. Shocking, isn’t it? When we get less goods for the same amount spent, or if we have to spend more to get the same quantity and quality of goods, it means our purchasing power has come down. In other words, this means the value of money has come down.

The next important thing is to know the rate of inflation or the inflation rate. It is the rate at which the prices of goods goes up in a year.You can get information on current inflation rate from daily newspapers. Say for example, the rate of inflation is 5% per annum. The value of Rs 100 will be worth Rs 95 at the end of one year. Today a pack of chocolate cost Rs 100, the same will cost Rs 105 after a year.

Idle money – good or bad?

If you have Rs 1 lakh and you do not invest and keep it for a period of 5 years. If the inflation rate is 5% per annum, then the value of Rs 1 lakh will become Rs 75,000. You will still have Rs 1 lakh in your account but with that Rs 1 Lakh you can only buy goods/services worth Rs 75,000 after 5 years.

What to do with my money

Do not keep your money idle. Invest money in instruments which gives a return more than the inflation rate. The instrument where the money can be invested can be selected based on the risk appetite and the investment objective. If you are not sure where to invest, first check the inflation rate and find out instruments which give returns more than the inflation rate. For example – You have a savings of Rs 1 Lakh, inflation rate is 5% and a bank fixed deposit gives a after tax return of 6.5 percent. In this case, invest your money in bank FDs which will give you a return of Rs 6500 (1,00,000*6.5/100). Inflation will decrease your investment value by Rs 5000 (1,00,000*5/100). Your investment of Rs 1 Lakh is Rs 1,06,500 after 1 year.

By investing, you have taken care of the inflation rate and your investment amount has increased.