Everyone knows that inflation eats into savings and increases costs. But what a lot of people grapple with is how does one insure oneself against inflation? In this article we discuss why it is important to invest wisely particularly if you do not want to keep running (working hard) just so that you can stand still (maintain your current standard of living).
In India, Consider the real rate of return Whenever you consider an investment option, remember to evaluate the expected rate of return in real terms. In other words, deduct your expected annual rate of inflation from the annual rate of return that you expect from your investment.
For example, say you are considering a bank fixed deposit that promises you 10% annual rate of return and your expectation of inflation during this period is 9%. For this investment, your real annual rate of return is only 1%. If your income from this investment attracts a 30% tax rate, then your post-tax real rate of return diminishes further to negative figure that means you are actually making a loss by investing in FD!
At the same time, if you have an option to keep your money in USD, no tax environment, even if you make 4 to 5% return on your investment you will still beat inflation and make your money grow because inflation in USD is 3% on an average.
The above example highlights that inflation and taxes are important factors to consider while evaluating investment returns and how a little more attention to your investment decisions can result in a significant improvement in your financial health.