The definition of inflation refers to the increase in price of goods and services which leads to the loss of purchasing power over time. As inflation continues to rise each year, the value of money keeps decreasing. Compound interest has its result, but inflation takes it away. Compounded interest is like inflation, but in the opposite direction. Prices become more unstable with inflation, eroding consumer power.

To understand inflation with an example, suppose that you have Rs.100 now, but do not invest it. Next year, it will be Rs.92 due to an 8% inflation rate. You will no longer be able to afford the same things if your income doesn’t increase by the same rate or more. The price of just one product is not inflation, nor is an increase in oil prices indicative of inflation.

In order to beat inflation, you should choose investments that yield higher returns than the inflation rate. A return of 6% on investment when inflation is 8% results in a negative return of -2%. Similarly, if you obtained a return of 9% when inflation is 8%, then your return on investment is 1%. Here are a few investment options to combat inflation:

Invest in Equity –

Equities are generally thought of as risky, but if invested over a long term, they can be a powerful way to beat inflation. A direct investment can be made by purchasing shares of a company or through mutual funds. Beginners/small investors might benefit by investing in mutual funds through an automatic monthly investment plan. These funds have a higher chance at beating inflation, since they are invested monthly and compounded.

Invest in Dividend paying stocks –

Dividend-paying stocks are a good way to beat inflation. Dividends received or expected to be received every year should exceed inflation.

Gold & Real Estate –

Several people believe that gold is an excellent investment against inflation. Some experts also suggest that real estate can be used to beat inflation. In light of this pandemic, you would want to tread carefully. Are gold and real estate good options for your portfolio? Before investing, it is best to consult an expert.

Diversify Globally –

Diversifying your investment globally can be helpful with the volatility and inflation within your country. Conducting extensive research and understanding your finances as well as global markets is recommended.

Inflation Indexed Bonds (IIB) –

Inflation-protected bonds protect the principal and interest and are a great way to beat inflation risk. The principal is indexed to inflation, so the return is greater than inflation.  For example, for an investment of 2000 rupees, you will receive interest of 8% on your bond. At the end of the year, you should receive Rs.160 in interest, however there is 10% inflation in that year. Unlike mutual funds and bank deposits, IIB investments provide a fixed index to your principal (principal + 10% inflation) and , increasing your principal and your interest rate.

Edited:

Inflation-protected bonds protect the principal and interest and are a great way to beat inflation

risk. The principal is indexed to inflation, so the return is greater than inflation. For example, for an

investment of 2000 rupees, you will receive interest of 8% on your bond. At the end of the year, you

should receive Rs.160 in interest, however there is 10% inflation in that year. Unlike mutual funds

and bank deposits, IIB investments provide a fixed index to your principal (principal + 10% inflation)

and a fixed interest of Rs.176, increasing your principal and your interest rate.

You can protect your money against inflation by using some of the methods described above. When you invest, it is recommended to do so based on your investment goals, but the end goal should be to beat inflation in all investments.

bloommystory@gmail.com – The word rate needs to be removed and also need understanding on how did you arrive at the number 176

@bloommystory@gmail.com

Hi, Thank you for taking the time to review. I have included an edited version for your consideration. I do hope this answers your earlier question.