🔹 Investments Not Beating Inflations : Introduction
Many people today feel comfortable keeping all their savings in a ‘safe’ place. When they think of investing, the first options that come to mind are fixed deposit (FD), recurring deposit (RD), or public provident fund (PPF) but the real fact is these investments not beating inflations.
However they often overlook a simple fact —**inflation**.
How inflation affects our investments is crucial because inflation gradually reduces the purchasing power of money.
The main reason behind this is the increasing inflation rate. The current bank FD interest rate is around 6–7%, while the current inflation rate is around 6%. Hence, investment instruments like bank FDs can never beat inflation.
Here we explore how inflation affects traditional investments and the strategies that should be adopted to avoid it.
🔹 Investments Not Beating Inflations : What is Inflation
In simple words, inflation is the increase in the prices of goods and services over time.
👉 If we take an example: suppose the current price of a product is ₹200. After one year, the price of the product increases to ₹206.
That means the inflation rate is 6%.
So, with the same amount of money, you can buy fewer things than before. If your rate of return is the same or lower than the inflation rate, it means your savings are actually shrinking in real terms.
🔹 Investments Not Beating Inflations : How Inflation Affect Traditional Investments
By traditional investment we mean fixed deposits (FD), recurring deposits (RD), public provident funds (PPF) or any other traditional options. Also you can learn about FD vs PPF vs Mutual Funds: 5 key differences you must know.
Let’s understand how inflation affects these traditional investments.
# 1️⃣ Fixed Deposits (FDs)
- Typically the rate from return of the bank – 6-7% p.a. (approx.)
- If inflation rate – 6% and FD return is 7%, then your real return – 1% only.
In this way, your FD rate often fails to beat inflation or beats it only marginally, and your purchasing power gradually reduces over the years.
👉 If we take an example: if you invest ₹1 lakh in an FD at a rate of 6%, it grows to ₹1.06 lakh in a year. But if prices also rise by 6%, your real gain is negligible.
# 2️⃣ Public Provident Fund (PPF)
- We usually get tax benefits under Section 80C from the Public Provident Fund (PPF)
- The usual rate of return from PPF is around 7–8% p.a. (approx.)
- While PPF can often beat inflation, the margin is usually very small.
- PPF has a 15-year lock-in period, so it has liquidity issues.
- If the inflation rate is 6.5% and the PPF return is 7%, then your real return is only 0.5%
# 3️⃣ Other Traditional Investment Options
- Savings account rate of return – 2.5% – 6.5% p.a. (approx.)
- Recurring deposits rate of return – 5% – 7% p.a. (approx.)
So, these others traditional investment options are also unable to beat the inflation or able to beat with very negligible.
🔹 Investments Not Beating Inflations : Why Stocks Market are Better Options
- If we look at past performance, we notice that stocks and mutual funds have generated higher returns (12–15%) than other traditional investment options like fixed deposits or public provident funds (although be it the stock market or mutual funds, Security and Exchange Board of India (SEBI) governs both). But before choosing mutual fund you should know about how to choose mutual funds as per age in India and 6 types of mutual funds and their benefits.
- Although there is market volatility risk in the short term, if we invest patiently and correctly for the long term, the stock market can easily beat inflation.
- If we invest ₹1 lakh in equities at an average rate of 12% CAGR, it becomes ₹3.1 lakh in 10 years — easily beating inflation.
🔹 Investments Not Beating Inflations : Ideal Strategies to Beat Inflation
After understanding how inflation affects investments, it’s important to know the ideal strategies to beat the inflation and protect our money.
- Don’t invest all your money in the traditional investment options.
- Keep your portfolio diversified; invest proportionally in FDs, RDs, PPFs, individual stocks, or mutual funds. In this regard you should know 5 smart ways to allocate your money (portfolio strategy for beginners).
- Follow systematic investment options (SIPs) and increase your SIP amount by 5–10% per year, but before that you should know what is SIP and Its benefits? and also you can learn about amazing ₹500 SIP plan to make ₹1 crore fast.
🔹 Investments Not Beating Inflations : Conclusion
In conclusion, we now understand how inflation affects our investments.
Therefore, it is important to choose investments carefully because investments not beating inflation can quietly reduce your wealth over time. To protect your money, focus on investment options that have the potential to beat inflation. Follow the balance portfolio approach. Investing in FDs or PPFs for safety and tax benefits and stocks and mutual funds for growth and wealth creation is essential.
In the end, it can be said that patience, a long-term view, and discipline are the keys to investment success.
❓ Frequently Asked Questions (FAQ)
Q1: How can savings be protected from inflation?
➡ To protect your savings from inflation, you need to take a balanced portfolio approach — having FDs, PPFs, stocks, mutual funds, and gold in your portfolio is the correct strategy.
Q2: How does inflation affects fixed deposits?
➡ Increased inflation reduces the real returns from your FDs significantly, causing your savings to decrease instead of increase.
Q3: Is it the right strategy to completely avoid traditional investments?
➡Not exactly, you should follow the balance approach, as you should invest FD, or PPF for the safety, liquidity or tax benefits and should invest in the stocks or mutual funds for the growth.
Q4: Why are stocks and mutual funds considered the best asset classes for long-term growth
➡ Because, if we look at past performance, we notice that stocks and mutual funds have generated higher returns (12–15%) than other traditional investment options like fixed deposits or public provident funds.
Q5: What percentage of equity asset classes should be held in a portfolio?
➡ It depends on your criteria, such as risk tolerance and time horizon. If you have a minimum time horizon of 5–10 years, it is advisable to keep 50–60% equity asset classes in your portfolio.
Q6: Is it possible to beat inflation through PPF?
➡ Although PPF can often beat inflation, it has liquidity issues since PPF comes with a fixed lock-in period.