Once we realise the importance of saving early we often tend to ignore or factor in inflation while planning investments for the future. Inflation is the rate at which the general level of prices for goods and services rises and consequently, the purchasing power of currency falls at the same rate over a period of time. Consumer inflation rose to 6.07% in July 2016 due to higher food prices. This constant rise in the cost of living is unnoticeable to many because it happens silently and gradually. It also doesn’t pinch too much because incomes usually rise faster than the 6-7% rise in inflation. However we will realise it once we stop working. The income will become stagnant in the retirement stage but the expenses will keep rising with every passing day. Some expenses such as medical care, which would be a fraction of the current expenses, will account for a larger chunk of the monthly budget as we grow old. Unlike discretionary expenses that can be avoided, healthcare is a non-negotiable expense that will have to be incurred no matter what.
We can do very little in terms of controlling prices of goods and services from rising. However we can shield ourselves against this consistent price rise by saving enough to be able to afford these products and services in future. In the past 10 years, the CPI inflation for urban consumers has risen by an average 8.07% (Source: Bloomberg). This means investments that offer less than 8% returns become less attractive. The only way to beat the incessant march of inflation is to invest in instruments that offer higher returns. Equity oriented mutual funds have a good long-term record of beating inflation. These investments are also very tax-friendly where in the long-term capital gains are not taxed if the holding period exceeds one year and becomes an ideal choice for investors to participate in the equity market via the SIP route.
SIP MY PERSONAL FAVORITE
(S)abse (I)mportant (P)lan
Systematic Investment Plan or SIP, offer a simple and disciplined way to accumulate wealth over long term. Mutual Fund SIPs work pretty much like bank recurring deposits, except they generate superior risk adjusted returns compared to recurring deposits. It brings in a disciplined approach to invest regularly and can be started with a minimum of Rs.1000 per month. SIPs are perfect for people who wish to generate long term wealth without investing too much time, money and efforts into it.
Benefits of SIP route:
·Easy Diversification: One of the basics of investing is to spread the investment corpus across different investments. Mutual funds offer an easy way to do this. Each mutual fund spreads money across a large number of investments
·Choice: There are mutual funds available for every kind of return and risk level and suitable for every kind of time horizon
·Convenience: One can easily invest as well as withdraw from mutual funds in any amount. Investments can be made by filling up a simple form or even online with a direct debit from one’s bank account. Similarly, redemptions can be made directly to your bank account
·Rupee cost averaging: - It averages the cost of investment – which means when the markets are down one gets more mutual fund units and when markets are up one gets better returns
·Timing becomes irrelevant: Need to time the market become irrelevant, since frequent investments ensure entry in the market at both high and low levels. Thus making it favourable in volatile markets