Suppose you are planning a big luxurious trip. Over the years, you have saved up a substantial amount of money to spend on entertainment, adventures, and exotic cuisines.
But suddenly, while booking tickets and checking hotels, you realise that the expenses you had eagerly planned now demand more of your funds. The hard-earned money you diligently saved has undergone a devaluation and reduced in value. This is the effect of inflation, a general rise in the prices of goods and services over time. It affects everyone differently, according to their location, income, and spending habits.
How does inflation affect your investments?
Your investments, whether it’s putting money into stocks, bonds, or other assets, can be significantly influenced by inflation. As the costs of goods and services surge due to inflation, the same money you have today will have reduced buying capacity in the future. This directly impacts the value of investment returns.
For example, if a mutual fund generates a 9% annual return, but inflation is 3%, the net return, which demonstrates the actual increase in purchasing power, becomes 6%. This reduces the growth potential of investments over the long term.
Savings accounts and fixed-income assets like bonds also suffer from inflation as their interest rates might not keep up with rising prices. This affects the interest value earned and the principal amount upon maturity. Inflation also impacts equities and stocks. While stocks have the potential to beat inflation, rapidly rising prices can impact consumer spending, leading to economic uncertainties that affect corporate profits.
This is where an inflation calculator steps in to save investors.
How to use an inflation calculator?
To use an inflation calculator, provide the initial investment amount, investment duration, and expected inflation rate as inputs. The tool will then compute the projected future value of your investments based on these inputs.
For example, suppose you invest Rs. 5,00,000 in a mutual fund scheme for ten years. If the inflation rate during those ten years is 4%, the inflation calculator will estimate your future investment value to be Rs 7,40,122. However, if you do not factor in inflation, you may wrongly assume that the future value would be higher. Hence, an inflation rate calculator is crucial to accurately depict your investment’s actual worth.
Benefits of using inflation calculators to calculate inflation
- Accurate projection – The calculator predicts the precise future value of your investments, factoring in your initial investment, investment period, and expected inflation rate.
- Informed decisions – With the calculator’s output, you can make rational decisions about your investments, considering inflation.
- Realistic planning – The tool helps you set realistic financial goals and create practical strategies by revealing the actual worth of your investments.
- Avoiding misconceptions – Without the calculator, you might overestimate your investments’ value by ignoring inflation’s impact.
- No additional cost – You can use an inflation calculator in India for free and see how inflation affects your investments over time to adjust your approach accordingly.
Inflation affects goods and services prices, employment, wages, and interest rates. As an investor, you must understand how inflation is calculated to make calculative decisions to protect your funds from its effects. The key is to stay updated about economic trends and factors such as government policies, global markets, and consumer behaviour. Most importantly, use inflation calculators to create a successful investment portfolio that can withstand the impact of inflation.