Invest prudently in mutual funds to fight inflation

Posted On Friday, Feb 21, 2014

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When it comes to eating preferences, we are either non-vegetarian or vegetarian. But looking at the way inflation is rising way faster than our earning capacity in general, we have come up with a new term - Infla-tarian!

Confused?? Don’t be. Looking at the way inflation is eating into our savings; this type of unusual eating preference could start to play around with our financial goals.

Inflation bites us at every small step of life. When you were in college, you might not have enough money to watch every movie at the cinemas or buy clothes from that one brand you desire, therefore you must have promised yourself that you could do everything that you always wanted once you get yourself a job.

Surprise!! ….You still can’t! As those designer jeans or tickets to the movies have become that much costlier.

All you might be doing is keep wondering why you still find yourself longing for those things? It is all due to one phenomenon – Inflation. When you were in college, the prices for the things you wanted to do must be let’s say Rs. 100, but now due to inflation rising fast the cost of those things would have gone up assuming to Rs. 300. Movie tickets are the best example of this. Remember, rising prices (inflation) will mean that your money is actually worth less and less as time goes by.

To judge how much money you are really making, you need to take inflation into account. For example, if inflation is 8 per cent and your money is in a deposit that earns 9 per cent, then your inflation adjusted return is around 1 percent or less.

Inflation plays a major role

Inflation Rate of 8% and its impact over your purchasing power

Year201420202025203020402050
Amount10,00015,86923,31634,25973,9641,59,682

Inflation adjusted returns

Inflation Rate8%8%8%
Returns12%15%18%
Returns after Inflation3.70%6.48%9.26%

The numbers used in the tables above are for illustrative purpose only. This illustration should not be construed as a promise, guarantee on or a forecast of any minimum returns.

So what is the next best step?

How do you save yourself from the monster called inflation? Its simple really, Invest prudently!

Easier said than done though, and brings about questions like where should you invest, what should you invest in? Mere saving will not help you combat inflation; you need to invest those savings wisely.

To generate more money out of your savings, start investing regularly. But before selecting any investment option it’s important to figure out your investment goals and objectives and the time period required to achieve them. Once these basic parameters are fulfilled, you need to decide which asset class and investment option will suit your requirement the most.

There are many asset classes including but not limited to Equity, Debt and Gold.

Equity Investments

Beating inflation could involve investing in instruments which have a slightly higher risk. Saving through market linked products might prevent inflation from eating into your returns. Equities can be one such asset class to give you good returns in the long run. It is important to understand that equities are more of a long term investment option, since generally equities as an asset class is expected to give good returns over a long period of time.

You may choose to invest directly in the market on your own, but you need to have the expertise and more importantly the time to manage your portfolio. In such a fast paced world it is suggested to outsource what is not your core competency. If you do have the time and resources then maybe you can invest in equities directly, for those of us who don’t - investing in equity mutual funds could be a better option since a mutual fund involves professional Fund Managers managing your money, therefore potentially reducing the chances of taking a wrong call on a stock.

Debt Investments

This type of fund invests in fixed income instruments such as debentures (bonds), Treasury Bills etc. This is preferred by investors who are not willing to take much of risk and have an intention to earn returns higher than what are possible to earn from other avenues like Fixed Deposits. Generally, fluctuations in the NAV of debt fund is less than the equity fund.

Gold Investments

Gold is innate to Indian culture but buying physical gold attracts costs like making charges, wastage charges etc. Today, comparatively efficient forms of buying and owning gold like Gold ETFs / gold savings fund have become available which can save additional costs/ charges associated with the traditional form of buying. Apart from the fact that in case of physical gold there is danger of theft, other advantages of owning gold through mutual fund route are:

1.Reasonable:
You can buy gold in small proportions
2.Value:
Trades like a normal equity share on the exchange - in tandem with domestic gold price
3.Low Denominations:
Invest in Gold with as little as Rs 500!
4.Protection:
The gold is stored in secured vaults
You can also invest in gold regularly via Systematic Investment Plans (SIP) through gold saving funds.

While the inflation is soaring, if you plan out your investments prudently, you won’t just save, but also successfully grow your hard earned money. The above options are different investment avenues from different asset classes, it is also important to diversify your savings across a few of these investment options and create a balanced portfolio.

It is always advisable to consult your financial advisor to help you with your investments.



Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

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