By Aditya Agarwal
If your wealth isn’t beating inflation, you are losing money. With the commencement of the new financial year, the widening gap between inflation and income from traditional investments has eroded the wealth of many Indians. This is a global phenomenon, with Pakistan and Sri Lanka being current examples of countries in turmoil due to widespread inflation among other economic problems.
The average post-tax Fixed Deposit return from India’s biggest banks is 2.5 – 3% lower than the CPI inflation of 6.07%. Also, Post-tax returns of most Debt Mutual Funds have barely managed to beat inflation.
An evident hike in petrol prices is noticed these past couple weeks and it has increased by a whopping 55% in the last two years in Mumbai, from Rs. 76 in April 2020 to Rs. 119 as on April 4, 2022
Added to this, there is shrinkflation where producers simply reduce the amount or contents of household goods without changing the price. If inflation is invisible, shrinkflation (or backdoor inflation) is nearly undetectable for the average consumer.
Unfortunately, inflation is not disappearing anytime soon. As people who help consumers manage their wealth, we suggest the following to build an inflation-proof portfolio.
You manage what you measure
Inflation remains invisible because we don’t keep track of our expenditure. Therefore, you should be able to put a number for the following questions.
How much am I spending and saving? How much is my portfolio performing? How much do I need to retire?
You can answer these questions by tracking your expenses, using retirement calculators and spreadsheets, installing apps, or the old-fashioned back-of-the-envelope calculations.
Look beyond FD and PPF
Given that no fixed deposit account in a commercial bank has lost money in the last 60 years, it is understandable why they are India’s favourite financial asset. However, despite their safety and ease, the real returns from FDs are in the negative territory, something which SBI admitted last year.
The purpose of the PPF is evident in its name itself. Since provident refers to funds to be used in an emergency, it is obvious that the product is not designed to turn investors into billionaires. This explains the recent reduction in its rates and taxation of investments above a certain limit.
As investors, you will need to look beyond FD, PF, or other products which offer so-called “risk-free returns”.
Save tax smartly
For those who haven’t shifted to the new income tax regime, you can reduce your taxable income up to Rs. 1.5 lakhs under section 80C. Probably, the best investment for this is ELSS funds. While PPF and tax-saving FDs have a lock-in of 5 years and 15 years respectively, ELSS funds have a lock-in of 3 years. As for their performance, see the table below.
InvestmentAmount after 15 yearsROI %Lock-inTax-saving FDsRs. 35 lakhs5.50%5 yearsPPFRs. 40.2 lakhs7.10%15 yearsELSSRs. 76.6 lakhs14%3 years
Educate yourself and consult a professional
Gold doesn’t always beat inflation, real estate doesn’t always go up, buying isn’t always better than renting, and IPOs are not a sure way to make quick money. Among other things, financial literacy is about understanding different asset classes and doing asset allocation, i.e. dividing your money such that it helps you meet your wealth goals.
While one can learn these things and become a DIY (Do-it-yourself) investor, we have come to realise that there is no substitute for a professional’s opinion.
Building an inflation-proof portfolio requires the same approach as maintaining one’s health; it requires knowledge of one’s body with the occasional advice from a specialist.
(The author is Co-Founder of Wealthy.in. Views expressed are his own and not necessarily of financialexpress.com. This content is for informational purposes only. Please consult a professional before taking any action)