Yesterday was Diwali and I spent a lot of time with friends and family and really enjoyed myself. Had a great dinner and burst a few crackers and saw a good movie in the night-- A truly relaxing and energizing day!
While i was thinking on the future I started thinking on the importance of residual/ investment income. While all of us understand the benefits of compounding in our investments- we forget that there is another piece of compounding that doesnt act in our favour--- INFLATION.
Because of inflation everything that we buy today is going to become more expensive tomorrow on a REAL currency basis. Hence what i could buy for 100Rs today-- we possibly cannot buy the same thing for the same amount after a year. Clearly we feel the impact of inflation in everything we buy today--- labour, vegetables, groceries etc.
When we look to keep our funds growing-- managing our funds-- it becomes extremely important for us to ensure that the Post Inflation return is positive .
So if you are in an 6% inflation scenario and you are invested in a portfolio where you are getting a 5% post tax return ( 7.57% fd return in a 33% tax bracket) your net worth is actually decreasing by 1%!!!
so when you plan your investments check out what your targeted rate of real return is... ie return post reducing inflation!
Happy investing!
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