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

L&T Growth

Invest in Mutual Funds Online Download Mutual Fund Application Forms   L&T Growth Fund (LTGF) is open-ended diversified equity fund that invests predominantly in large caps. LTGF follows the growth style of investing and has been in existence for over 10 years now.   Type of scheme Open-ended Category Diversified equity Sub-category Large Cap Style Growth Launch date September 17, 2001 Risk-Return proposition High risk-Average return   Investment Objective and Proposition The fund's primary investment objective is "generate long term capital appreciation income through investments in equity and equity related instruments; the secondary objective is to generate some current income and distribute dividend. However, there is no assurance that the investment objective of the scheme will be achieved." Following large cap ...

Gold ETFs - Tracking Error

Invest in Mutual Funds Online Download Mutual Fund Application Forms At present, there are 13 gold ETFs and three gold funds of funds OVER the past few years, gold-backed exchange traded funds ( ETFs ) have emerged as preferred investment tools for people who want to take advantage of the price rise in the metal without the hassles of physically buying it and preserving it. Since 2007, when the first gold ETF-benchmark BeES was launched in the country, there has been a steady increase in the investments going into this paper gold. In the past four years, several fund houses launched their gold ETFs and some of them have even launched gold fund of funds, which invest in gold ETFs. At present, there are 13 gold ETFs and three gold fund of funds. Though all these funds have gold as the underlying asset and they closely track the price movement in the commodity, the net asset value (NAV) of a gold ETF does not exactly reflect the value of the physical gold and the return...

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...

Equity ETFs vs Diversified Equity Mutual Fund

Invest in Mutual Funds Online Download Mutual Fund Application Forms   The importance of being active couldn't have been explained better. To put it simply, one needs to be active in his or her daily life, if one desires to succeed. An active mind always helps in making sound decisions which otherwise (if you are not active) could lead to chaotic situations (one does not make the right decision). On the other hand if you remain passive (i.e. not active) in whatever you do, you will surely see yourself at the losing end.   Now, that you are aware of how important it is to be active, make sure that your investments are active in generating long term growth in order to make you wealthy as well as healthy.   While investing in mutual funds too, you investors need to be careful while selecting the right mutual funds according to your ability to bear risks. You need to keep in mind that while there are mutual fund schemes which are actively managed in order ...

Nomination in Investment

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Nomination in investment   As an investor, you spend most of your precious time in deciding on your investments, their tenure, and the returns that your invested money will fetch practically. Do you know who gets your investment money when you are "no more"? I am sure most of you must have come across the 'nominations' column, while filling any of your financial application form, be it that for a Mutual Fund, or a Demat Account, or simply a Bank Account. More often, people have a tendency to leave the nomination field blank, or fill the same uncertainly, without even understanding the big importance of this little detail. Here, let us try to put forth the significance of a nomination into our financial lives. What is nomination? A person to wh...
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