Inflation
Understanding how inflation affects your investment returns and purchasing power.
Inflation: The Silent Wealth Eroder
Inflation is the general increase in prices over time, which reduces the purchasing power of your money. It's the invisible force that makes ₹100 today worth less than ₹100 a decade from now.
Real Rate of Growth
When evaluating investments, always consider inflation. The key formula:
Examples
Positive Real Growth
Investment grows 12%, inflation is 5% → Real growth = 7%. Your purchasing power increased.
Negative Real Growth
Investment grows 4%, inflation is 6% → Real growth = −2%. Despite positive nominal growth, you're losing purchasing power.
The Long-Term Impact
Consider ₹10,000 with 8% nominal growth and 4% inflation:
- Year 1: ₹10,800 nominal / ₹10,400 real
- Year 5: ₹14,693 nominal / ₹12,167 real
- Year 10: ₹21,589 nominal / ₹14,802 real
Over 10 years: nominal growth of 116%, but real growth of only 48%. Inflation consumed more than half the gains.
India's Inflation History
India has historically seen inflation of 5–8% per year. At 7% inflation (Rule of 72), prices double every ~10 years. What costs ₹50 today will cost ₹100 in 10 years.
Inflation-Beating Investments
- Equities / Index Funds: Historically 12–15% in India — well above inflation
- Real Estate: Property values and rents often rise with inflation
- Gold: Traditional inflation hedge, though volatile short-term
- Inflation-indexed bonds: Returns linked to inflation index