Effect of inflation on investments

What is inflation?

Inflation can be understood as the sustained increase in the price of goods and services over time. As inflation increases, your purchasing power decreases, meaning each rupee you own would buy lesser goods or services than it did ten years ago due to positive inflation.

costs celso 6

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Inflation and Interest Rate

The interest rate mentioned on any investment product is the nominal interest rate. Taking an approximation of the formula:

Nominal Interest Rate = Real Interest Rate + Inflation

Thus, an interest rate of 8% on your fixed deposit really gives you interest at 4% (taking inflation rate to be 4%).

Let’s take an example to understand this better. You have 10,000 rupees that you put in a fixed deposit at a rate of 8% per annum for a year. After a year, you receive 10,800 rupees. However, during this period, inflation grew at 10% per annum, which means your actual return is negative! Why? Because if a bottle of water was priced at 10 rupees when you invested the money, it is now priced at 11 rupees. You could have bought 1000 bottles of water with 10,000 rupees then, but now you need 11,000 rupees buy 1000 bottles of water (you only received 10,800 rupees when your FD matured).

This example shows how inflation can bring down the effective value of your returns. So where should one invest to be relatively safe from the effect of inflation?

Understanding the risk of inflation is key to smart investment. Keeping your money in a locker would also lower its value over time.  You’d rather opt for one of the following:

Gold and Silver – Though gold and silver tend to retain their purchasing power over time, this may not always be the case. Investing in gold doesn’t provide you any real income but only a source to rely on in the future.

Bank Deposits – Considering the continuously lowering interest rates and inflation crossing 5%, investing in fixed deposits is like filling a trickling bucket. All it may do is keep the value of your money intact (if inflation doesn’t hit the roof) but not offer any real returns.

Equity – Investing in equity or mutual funds over a long period of time can be a good strategy for fighting inflation. A diversified portfolio can spread your risk and offer consistent returns if you stay invested for a long term.

  1. Finding stocks that pay dividends is a good idea as dividends coupled with capital gains can effectively fight the effect of inflation on your investments.
  2. Fixed income funds such as corporate bonds and senior secured loans yield more than inflation in the long run and offer much better interest rates.
  3. Buy some utility stocks. The demand for water, gas, electricity etc. would always grow despite the upward or downward market trends. Though mutual funds investing in utilities rise and fall in tandem with the economy, the dividends make them an ideal choice for investment.

Worried about the long term value of your savings? Let Nave Marg guide you towards a secure and prosperous future by helping you invest right.



All about Tax Saving Funds

What are tax saving funds?

Tax saving funds, popularly known as ELSSs or Equity Linked Saving Schemes, are mutual funds that invest in equity and equity related securities.

Under Section 80C of the Income Tax Act, you can claim deductions of up to 1.5 lac from your taxable income for the amount invested in ELSSs.

While 80C allows deductions on investments under various schemes such as PPF, NSC and insurance plans, ELSSs are usually the best bet for investors with medium to high-risk appetite.

Advantage of ELSSs over other investments:

  1. Shortest lock in period of 3 years
  2. An average return of 14-15% outperforming most other investment options
  3. Dual benefit of tax saving and wealth creation
Know more to save more!

Image courtesy of FrameAngel at FreeDigitalPhotos.net

How to get the max out of your investment?

  1. Choose a well-managed fund after taking into account the historical performance of the fund
  1. Don’t invest in a lump sum as the market may be down that time shrinking the value of your asset
  1. Going for monthly SIP is a good idea to average out the risk
  1. Don’t limit yourself to the 3 year lock in period. ELSSs are open ended schemes and you could continue for as long as 10 years. Further, most tax saving funds are conservative in nature which means the risk factor is lower, making them an ideal investment option for long term.

All mutual fund companies offer tax saving funds. At Navemarg, we provide you expert financial advice to make your money grow, effortlessly!



Real Estate or Mutual Funds?

Paying hefty EMIs for your home or planning to take a home loan soon? Do you really need to buy a house though?

Investment in real estate has always been favoured in India. For emotional, social and cultural reasons, buying a house is the first priority for most Indians.

Further, many of us have seen phenomenal returns on our property. Say you bought a house for 15 lacs in the year 2000 in the outskirts of Pune, today your property would almost be worth over 60 lacs.


However, while you see the benefits of holding and owning this tangible asset, real estate is losing its gloss.

According to statistics, there are more houses under construction in India than there are households. In fact, builders are offering huge discounts in many places to get rid of the backlogs on their projects.

While many may choose to buy a property, investing in an SIP over a period of time can give you much higher returns. Many people believe that investing in mutual funds is a risky proposition. However, as they say, timing is everything. Every investment has two aspects – risks and returns.

Only foolish would think of property as a less risky investment. Both real estate and mutual funds belong to the growth asset category. Their performance completely depends on the performance of the economy.

As far as returns are concerned, taking into account the above example – the property that you bought for 15 lacs in the year 2000 currently stands at a value of 60 lacs. Using a CAGR calculator available online, we see that the property has grown at a rate compound annual growth rate of 9.68%.

Not bad at all. However, even fixed deposits with the bank in the recent past are offering an interest rate of up to 9%.

You would be further surprised to know that top funds have been consistently giving a return of over 14% if you stay invested for long enough. Now whether you choose to buy a house or build a portfolio is completely your choice, however, if you are a salaried employee with measured savings, SIPs can be your best bet for a richer future.

Picking the right mutual fund

Planning to invest in mutual funds but not sure which fund is the best for you? Many investors face dilemma and end up not investing at all or choosing a low performing fund.

Picking the right fund is not as difficult as it seems. Dr Celso shares some tips to help you make a smart choice:

Picking the right Mutual Fund
Picking the right Mutual Fund

Investment Goals

The first step is to identify your future goals – why do you want to invest? Are you building a fund for your retirement or planning to use the returns for some purchases in the near future? By identifying your goal, you will know whether you need to opt for funds offering long term capital gains or short term income funds – bringing down the number of funds to choose from dramatically.

Risk taking capability

The performance of mutual funds is related to the overall performance of the economy and thus, incorporates a certain amount of risk factor. Are you capable of mentally dealing with the ups and downs in the market or would you prefer a more conservative approach to investments?

Fund type

Depending on how long you think you could tie up your money, you could choose between income funds and long term appreciation funds.

Income funds are mutual funds that aim to generate a monthly or quarterly income stream for the investors by investing in securities such as government securities, certificates of deposits, corporate bonds and money market instruments.

However, if you have time in hand, investing in long term capital appreciation fund is a good idea. With a fair amount of risk involved, the returns can be quite high over time as most assets held in common stocks.

Monitoring past growth – consistency is the key

Monitoring the performance of a fund over a period of time can give you a fair idea about its future growth. Instead of looking at short term returns, look for returns over longer periods. A good mutual fund is one that has been performing consistently and outperforms its peers when faced with similar risks.


A diverse portfolio has much lesser risk propensity compared to a portfolio biased towards a particular stock or asset. It gives you the two fold benefit of risk reduction and capital preservation. A good strategy for risk-averse customers who are looking at long term gains rather than immediate windfall gains.

Fee and charges

Do you know how mutual funds make money? Of course, by charging you a fee. The most common is the load fee which is charged either at the time of investment or at the time you sell your investment. It can typically cost you anything up to 8.5% of the invested amount.

Save up on accessory fee and charges by opting for no-load funds.

Choosing the right fund is not as difficult as it seems. Follow these simple guidelines and be clear of your objectives to make a good choice. Dr Celso at Nave Marg (Goa) can guide you through your investment journey by helping you choose the right funds and managing your portfolio for you.