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You can indirectly taste inflation at the dinner table, when family members complain on missing their favourite dish due to rising prices. You feel inflation at the petrol pump when you pay more for the same quantity of petrol. All over the world, inflation is a constant companion.
At the time of India’s independence in 1947, your grandfather would have possibly paid 40 paise* for 1 kg of sugar. Cut to 2024, you are likely to pay Rs 49.0-51.0** for the same purchase online. Or, in 77 years of independent India, your family has experienced an average annual inflation of 6.44-6.49 % for sugar, a mass consumption item. Clearly, inflation spares no one, be it rich or poor.
Money’s purchasing power The pain from inflation is felt more during periods of high inflation but it is always at work, nibbling or biting your money’s ability to buy things. A person retired in 2014, in 2024, will find a Rs 500 note would buy Rs 307.62 of what it could in 2014, a 38.48% decline.
Costlier loans Inflation often causes new loans such as those for homes, cars, and personal loans, to get costlier with higher interest rates and higher EMIs for existing loans.
Dent on fixed income investments Growth of money in fixed income investments gets dented substantially and those depending on them for income, like the retired, suffer a squeeze in lifestyle.
Long term effects of inflation often remain hidden from plain sight with three important areas of healthcare, higher education and retirement getting disproportionately affected.
A leading Insurtech company pencilled India’s medical inflation to 14%^ in 2023, the highest in Asia. This is far higher than the general inflation of 4.38%*** that year. A report in 2020 by Milliman, a global consulting firm involved in insurance and employee benefits, found in 2019 healthcare inflation in India exceeded 9%^^. This was far higher than general inflation rate of 4.77%*** that year. The true impact of healthcare inflation can be appreciated by the fact that the two studies found 62%^^ and 71%^ of healthcare costs being met from people’s own pockets.
Higher education inflation has also been higher than general inflation. Take the case of the prestigious Indian Institutes of Technology (IIT). Tuition fees increased from Rs 25,000 to Rs 50,000# in 2008, which in 2013, rose to Rs 90,000. In 2016, it was raised to Rs 2 lakh. This effectively meant an annual increase of 23.11% in the decade of 2008-2017, compared to annual general inflation of 7.18%*** during the same period.
Indian are increasingly leading longer lives. This means an ever increasing target of adequate retirement savings to counter inflation. According to a January 2023 report by Pension Fund Regulatory and Development Authority (PFRDA), India’s pensions regulator, during 2014-18, life expectancy at 60 was 17.4 years for males and 18.9 years for females##. With rising income and better access to healthcare services, this is all set to go up.
Early work life At this stage, with rising expenses, such as for house rent, you need to periodically review the adequacy of emergency fund i.e., or money earmarked for emergencies and augment it, if required.
While aiming to secure the regular investment regimen, investments need to be made before meeting expenses. This can be possibly be done with mutual fund investments through SIP investments. For the uninitiated, SIP full form is Systematic Investment Plan where a pre-decided amount is regularly invested in a mutual fund scheme.
One needs to plan and track expenses with the help of a home budget. Big ticket purchases with loans should ideally be avoided with EMIs restricted up to 10-15% of take home pay.
Approaching retirement and in retirement Often, at this stage, people tend to move their money to income generating investments and keep it there. Besides progressive erosion of purchasing power, emergency fund needs to be periodically augmented.
Inflation has different effects on returns from investments in different asset classes like equities, debt, and commodities. Research studies have found that over long periods like 10 and 15 years, debt investments like fixed deposits (FDs) and bonds struggle to keep pace with inflation&. Gold typically matches or beats inflation. Experts typically recommend a small amount of investment in gold to hedge against inflation.
Long term returns from real estate typically beat inflation but require large upfront investments and have limitations on liquidity. In the past, it is investments in equities that have consistently beaten inflation over long periods like 10-15 years$ despite experiencing market volatility in the short term.
Thus, for needs expected to arise in 8-10 years or more, equity investments are considered appropriate. For needs expected to arise in 4-8 years, a mix of equity and debt investments can be considered. More the time at hand, greater the equity investments. It is here that mutual funds can help.
For needs expected to arise in 8-10 years or more, one can consider SIP plans of equity mutual funds. For instance, A start can be made with tax saving mutual funds like ELSS or the Equity Linked Savings Scheme (ELSS). They combine with potentially high long term growth combating inflation with annual tax deductions of up to Rs 1.5 lakh under Section 80C.
With pay hikes, investors can invest in other equity mutual funds like index funds and large cap mutual funds, earmarking them for goals like children’s higher education and retirement. Subsequently, investments can be made in higher risk equity mutual funds with potentially higher long term returns like mid cap mutual funds and a small cap fund.
For needs arising in 4-8 years, one can consider hybrid funds that invest in a mix of equity and debt investments. Of course, mutual funds investing 65% or more in equities like in a balanced advantage fund, benefit from being treated as equity investments and lower equity mutual fund taxation, however we suggest you to consider your tax consultant before investing. Mutual fund portfolios can be created by the investor by herself or the with the help of an experienced mutual fund advisor.
To sum up, one needs to recognise the ever-growing inflation and should have a plan to combat and tame it.
* Source: Derived from https://www.outlookindia.com/magazine/story/price-of-freedom/204083
** Leading ecommerce sites
*** https://www.statista.com/statistics/271322/inflation-rate-in-india/
##https://www.pfrda.org.in/myauth/admin/showimg.cshtml?ID=2511
&https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3959885
An investor education & awareness initiative.
The above is only for understanding purpose and shouldn’t be construed as investment advice provided by the AMC. Consult your financial/tax advisor before taking investment decisions. The % of return, if any, mentioned in this article will depend upon various factors including the tenure of investment, type of scheme, prevailing market conditions, view of Fund Manager on the market etc.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
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