The topic of investment gives rise to a lot of questions, and the foremost is: where should we invest?
If we do not invest the savings we have, the value of that money keeps decreasing because of inflation. Inflation is the rate at which the prices of goods and services keep increasing, bit by bit.
Take movie tickets as an example. In the 1980s a movie ticket was priced at 20 rupees; today the same ticket may cost 300 rupees.
The prices of essential goods have been rising in the same way. Going by prices published in the Deccan Herald up to 2018, and checked against current prices in online grocery stores, sugar has become 125% more expensive, while dal and milk have risen by 85% and 89%. Our incomes do not rise at the same rate: it is very rare for anyone to receive a 125% raise.
These prices are approximate, and what you pay may vary. But they show the effect of inflation, which we often forget to notice or overlook. With 150 rupees in 2014, you could have bought sugar, dal and milk; today the same amount no longer stretches as far.
This is the time value of money: 150 rupees is worth less today than it was in 2014. In the same way, the value of our savings decreases every day because of inflation.
Suppose your monthly expenses today are 50,000 rupees. After ten years, the same expenses could grow to 2 lakh rupees because of inflation. And if you think that 2 lakh rupees can somehow be managed, remember that in ten years, 2 lakh will buy only what 50,000 buys today.
So if we aren't investing, or our investments aren't earning a return that keeps up with inflation, we will barely meet our expenses. Our investments must grow at least as fast as inflation, if not faster.
What to do about it
- When you look at any investment option, consider its real rate of return, not just its rate of return.
- Real return = rate of return – inflation rate.
Common investment instruments include:
- Fixed deposits
- Debt funds and bonds
- Equity and equity funds
- Gold
Looking at their real rates of return:
- Fixed deposits and debt funds are generally good investment options, but only for the short term, not the long term.
- Long-term investments should beat inflation.
For more on fixed deposits, debt funds and equity funds, watch Science of Paisa on YouTube (opens in a new tab).