Skip to main content

Consider Inflation while Making Investment Plans

Invest in Mutual Funds Online

Download Mutual Fund Application Forms



External factors such as inflation, government regulations, interest rates and volatile stock markets can have a major impact on the financial planning exercise of an individual. These factors, especially inflation, hurt our standard of living. Rising prices mean you have to pay more for the same goods and services. If your income increases at a slower rate than inflation, your standard of living declines even if you are making more money. When we consider an investment option or a financial product, we need to evaluate the expected rate of return in real terms, i.e. if an investment option offers 10% pre-tax return in 1 year and the current inflation rate is 5% then the 'real' pre-tax return from the investment is approximately 4.8%.


Interestingly, however, a survey conducted by HDFC Life in association with Value-Notes (a leading provider of market intelligence and research) reveals that only 30-36% consumers take inflation into account during financial planning. It was surprising to note that people do not acknowledge that the external factors can significantly impact financial needs.


The survey results show a low level of financial literacy in urban India, both in terms of events (expected, unexpected, and external factors) that need to be considered and the product choices available to mitigate the various life risks. A deeper reading of the findings reveals that consumer awareness (aggregate score of 28.2 on a scale of 0-100) about important events around which they need to plan finances, borders on being extremely poor. Although they score better (aggregate score of 58.3 on a scale of 0-100) in terms of knowledge about the various financial instruments available, the score still falls in the low range. This indicates that although urban consumers have some level of knowledge about various financial products, they appear completely out of sync when it comes to deciding where, when and how they need to allocate their finances.
These findings bring to the fore the core essentials of a financial plan as below:

Identify and quantify your goals

Once the goals are identified, you may approach the target investment across diverse financial asset classes – fixed income, market-linked insurance products etc. However, to arrive at the investment target, you must consider external factors, especially inflation. Let me cite an example. You are 30 years old and plan to retire at 60. Your current annual expenditure is . 3,00,000. This means you would need a corpus in excess of . 2,00,00,000 to maintain your living standards, assuming you live till 85 years and the inflation rate is 4%. To build this retirement corpus, you need to invest . 3,60,000 per annum in a retirement plan that offers 8% returns per annum. Now, how do you arrive at a savings figure that you will need to cover your liabilities and family needs if you die prematurely? Let's consider a healthy 25-year old guy with an income of . 1,00,000 per annum. Let's assume his income will increase at a rate of 10% per annum, while the inflation rate will be 4%. At 50 years of age, his real income would be around . 10,00,000 per annum. However, in case of his unfortunate demise at an early age of 42 years, the loss of income to his family would be nearly . 5,00,000 per annum. This means, if he is investing in a protection plan, he must aim for . 10 lakh life cover.

Revisit, evaluate & realign your investment

Once you have zeroed in on a financial plan, it is important to revisit, evaluate, and realign it periodically. For example, if you have invested in an equity-linked product for your retirement, and if you are nearing maturity, you should consider shifting the corpus to a debt-fund for security of the returns on investment. Certain government regulations or interest rate changes can have an impact on personal finance. Financial plans must be revisited and evaluated in line with macroeconomic situations and life stage needs. A visit to a certified financial advisor can serve useful.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

 

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

 

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

 

Best Performing Mutual Funds

    1. Largecap Funds:
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    3. Mid and SmallCap Funds
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    4. Small and MicroCap Funds
      1. DSP BlackRock MicroCap Fund
    5. Sector Funds
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    6. Gold Mutual Funds
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...
Read more

Myths about Exchange Traded Funds (ETFs)

1) ETFs Are Similar to Individual Stocks: Like MFs, ETF consist of an underlying portfolio of securities that's designed to follow a specific index or investment strategy. Hence, they are as diversified as various mutual funds. 2) ETFs Only Invest in Equity: Since they are listed on the exchange, the general belief is that ETF only consists of equity asset class. Globally, ETFs are available across asset classes – equity, debt, commodities, real estate and so on. In fact, over the past couple of years, India has also seen the emergence of Gold ETFs. 3) All ETFs Are Index Funds: ETF started as a fund which used to track indices and hence they were branded as index funds that are listed. However, ETFs have progressed rapidly and are no longer associated only with passive index funds. Globally, we have seen the launch of actively-managed ETFs. In India, also we recently saw the emer gence of fundamentally-weighted ETFs on Nifty, which busts the myth that ETFs are index funds and can...
Read more

Good Loan

Why Is It A Good Loan?: Loans against gold are cheaper and better than personal loans as the former are available at lower interest rates. In contrast, the interest rates on personal loans are not standardised and can vary from bank to bank. Also, a personal loan depends on a host of factors including, the borrower's salary, profession and the purpose for which the loan is being taken.      For instance, the interest rate on a personal loan of 5 lakh falls in a wide range of 15-30%. But loans against gold are available for as low as 11%. Secured borrowing such as a loan against gold, investments or property is cheaper because it is backed by some assets, which command a good value at any point of time. If the borrower defaults on the loan, the banks can liquidate the assets to settle the loan account.    Being a secured loan, the risk of default and credit losses is significantly lower in this loan compared to other forms of loan for personal use. Given the lower risk, gold loa...
Read more

Reliance Health Total

  Reliance Life Insurance has launched Reliance Health Total, a non-linked, non-participating and non-variable health insurance plan . It provides a fixed benefit cover for hospitalisation, critical illnesses and surgeries. The customer can also make a claim for over-the-counter health-related expenses. This is a regular-pay, five-year plan that can be renewed till the age of 99. The plan comes with two options: customers can choose a higher medical reimbursement benefit or a higher sum insured. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - I...
Read more

REC Tax Free Bond Issue

Tax Saving Mutual Funds Online Current open Infra Bond Application form   Download REC Tax Free Bond Application Forms REC (Rural Electrification Corporation) is going to issue tax free bonds and the issue will open on March 6 2012 and will close on the 12th of March 2012 When you buy 80CCF infrastructure bonds, the amount you invest in those bonds get reduced from your taxable income but in these bonds that's not going to be the case. The interest on these bonds will be tax free and they are similar to the other tax free bonds like the HUDCO, NHAI and PFC issues. For the two of you interested in knowing this – these bonds are tax free under Section 10(15)(iv)(h) of the Income Tax Act. Now on to the issue itself and let's start with the high credit rating that the issue has got. The REC tax free bond issue has been given the highest rating by all issuers since the government owns the majority stake (66.8%) in REC, it has been consistently profit making,  this is a se...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now