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Inflation reduces the purchasing power year by year & increases the cost of goods and services. We should look for an investment vehicle which can provide a higher return over & above inflation. You can protect yourself from the effect of inflation with the help of a diversified portfolio of various asset classes like direct equities, mutual funds, real estate, debt, cash & gold.
Value of money/purchasing power is decreasing every year because of Inflation (Inflation assumed at 6%)
|
Year
|
Amount
|
|
1
|
10,000
|
|
2
|
94,000
|
|
3
|
88,360
|
|
4
|
78,075
|
|
5
|
73,390
|
|
6
|
68,987
|
|
7
|
64,848
|
|
8
|
60,957
|
|
9
|
57,299
|
|
10
|
53,862
|
Cost of product & services are increasing every year:
Let’s take a simple example: if you are planning for your Children’s higher education which currently cost Rs. 5 lacs & money will be required by your child after a period of 15 years.
Let’s assume cost of education is increasing by 8% per annum. How much money will be required by your child after a period of 15 years from now??
Your child will require a sum of Rs. 15.86 lacs approximately.
Hence, whenever you are looking to buy a product to achieve the above mentioned goal, keep tax & inflation in mind. You need to calculate the net yield post deduction of inflation & taxes.
You need to understand that whether the return is positive OR negative, if you take inflation & tax into account.
If you fall into a tax bracket of 30% and inflation is 6% PA then your require rate of return would be 8.57%. This would be the minimum rate of return, you should be looking for in order to keep the value of your money intact.
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