Inflation, in simple terms, refers to the increase in the prices of commodities and services. It has a direct impact on the time value of your money. It means that your wealth might not have the same value after a few years. For example, if you are paying INR 20000 as rent for a 3BHK house might increase to INR 30000 in the next five years for the same flat.
There is one thumb rule to understand the effects of inflation. It is known as the ‘Rule of 70’. It says divide 70 by the rate of inflation and it will give you the number of years by when the value of your wealth by 50% of its today’s value. For example, if the current rate of inflation is 5% and you have INR 40 lakhs. After 14 years (i.e., 70/5), the value will be INR 20 lakhs.
Beat Inflation with a Portfolio of Mutual Funds
Mutual funds are a class of assets that has become one of the most popular investment options. The most looked after feature of mutual funds is the benefit of diversification. Mutual funds allow investors the advantage to invest in multiple companies across different industries. It provides a safeguard against the risk of uncertainties. Diversification helps to minimize the risks while at the same time also average outs the returns. So, any losses in any particular sectors are adjusted through high performing stock in the same portfolio.
There are also a large variety of investment options that are available in the market. Growth funds are said to be one of the best performing mutual funds in inflationary periods. Apart from this, other categories help you to reap good returns on your investments. In the past years, equity mutual funds have shown the potential to deliver an annual return of 11% to 14% in the long term. Mutual funds give you 2 investment options. The first is to make a one-time lump sum payment, the other is in the form of SIP. You can make regular investments into best performing, starting with just INR 500 per month.
Conclusion: Making regular investments in mutual fund schemes could be considered one of the best ways to overcome the effect of inflation on your investment. It provides returns higher than the rate of inflation and minimizes associated risk by diversifications.