How to beat inflation | Investment tools to beat inflation in India

How to Beat Inflation in India?

How to Beat Inflation in India?
How to Beat Inflation in India?
There is an old saying that 'money flows', which is indeed the case. We tend to spend money whenever it is available to us, and in fact, our money loses value over time. Due to the gradual increase in inflation, the purchasing power of the average Indian decreases. The loss of value of the currency is caused by the rising price level, which is why combating inflation is so important for Indians.

There is an old saying that 'money flows', which is indeed the case. We tend to spend money whenever it is available to us, and in fact, our money loses value over time.

Due to the gradual increase in inflation, the purchasing power of the average Indian decreases. The loss of value of the currency is caused by the rising price level, which is why combating inflation is so important for Indians. Do you find it shocking how inflation is eroding your purchasing power? Therefore, the ideal solution is to fight inflation. This is why we have written this blog post on 'How can you beat inflation in India?

Let us take a look at it!

What is Inflation?

In general, inflation refers to the increase in the prices of goods and services over time. Inflation also affects a company's performance in several ways, including its stock price.

When inflation rates increase, it leads to a decrease in the purchasing power of your money. In other words, this affects your "buying power" because you can now buy less with your money. Inflation measures decrease the purchasing power of money and therefore affect your purchasing power. Since you have less money to spend, your purchasing power decreases.

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How does inflation eat your money?

Any increase in prices will deplete your savings and investments and reduce your quality of life. You may not be saving and investing as much as you used to because inflation is rising rapidly. So the rise in prices puts more strain on your savings and investments.

Maintaining a decent standard of living becomes more expensive as inflation has increased. If you have not increased your income over this period, you have less purchasing power as the cost of goods has increased. 

It's not just our day-to-day spending that can be affected by inflation, but also our investments, pensions, and savings.

Nominal Return vs. Inflation-Adjusted Return

Normal Return

A normal rate of return is calculated by subtracting the capital, investment, and operating costs from the gains on an investment.

Inflation-adjusted rate of return

An inflation-adjusted rate of return measures how the rate of return for a period is calculated when the rate of return is adjusted for inflation.

The comparison

  • Nominal returns determine the change in the purchasing power of the currency. Inflation-adjusted nominal returns include the actual increase in purchasing power you would see if returns were adjusted for inflation.
  • Rising prices affect your ability to buy goods and services, which will decrease your purchasing power. A fixed amount of money allows you to buy a certain amount of goods and services.
  • Moreover, the investor's tax rate would have to be factored into the real return, meaning that if the nominal return is adjusted for taxes, the investor will receive a lower return.

How does Inflation Impact Your Savings?

A reserve fund plays a crucial role in supporting you in times of financial difficulty. To become wealthy, you need to invest as well as save. Saving habits are often the key to earning an investment return.

Your savings will be more valuable if you have saved in an inflationary environment. Inflation threatens your savings account because a good or service price increases in an inflationary environment.

At a 3% inflation rate, the price of a ₹200 product will be ₹206 next year. Almost every aspect of our spending is affected by inflation. If you save ₹30,000 this year, you will likely lose a large portion of it.

Also, read: How to Plan Retirement With SWP | Mutual Fund SWP vs Annuity

Investment Tools to beat Inflation in India

In the remainder of this section, we will examine some ways to invest in India and determine if they have been successful in the past. Don't forget, past performance is not always indicative of future results.


Equity markets are another great investment option if you are looking for long-term growth. Volatility dominates the short-term landscape of this market, which is characterized by ups and downs.

Investing in the stock market involves many risks but is rewarded by high returns. The Harshad Mehta scam of 1992 damaged market confidence, but SEBI's tighter regulations and the relative stability of the stock markets are helping to restore investor confidence. 

However, compulsive buying and selling are not always wise. A thorough understanding of how these stocks work is really important, and experience is the best teacher!

Equity mutual funds

Investors can invest in stock mutual funds instead of buying stocks directly. As with stock mutual funds, there are subcategories tailored to different investors. 

Equity funds can be categorized by market capitalization, sector funds or equity funds by investment strategy, tax-saving funds, etc.

Till April 2021, most equity fund categories recorded 5- and 10-year returns of over 10%.

Debt mutual funds

It is also possible to invest in bond mutual funds, such as debt securities and government bonds. These investments are liquid and pay fixed interest rates. 

Changes in inflation affect interest rates. This can help you beat inflation. As far as investment types go, investors have a variety of options. They can choose the best type depending on their situation.

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Gold is considered a 'haven' by experts all over the world. Indians trust this metal as a second investment option. The Indian market for this metal is very strong. In the past, gold prices have risen, and returns have offset inflation, so gold can be used to hedge against inflation. 
The World Gold Council estimates that if inflation increases by 1%, gold demand will increase by 2.6%, increasing gold prices. Despite occasional fluctuations, prices have risen steadily in recent decades.

A person can invest in gold through gold bonds, gold exchange-traded funds, digital gold, gold savings plans, and others. Although gold investments come with additional costs, do not provide a steady cash flow, and are subject to capital gains tax, diversifying a portfolio with gold is beneficial.

National Pension System (NPS)

National Pension System (NPS) is one of the best investment cum retirement plans in India. The market-linked multi-tier-based Government-backed scheme was initially launched in 2004 for the sole government employees. But, now any resident of India can invest in the same. NPS includes financial instruments like corporate bonds, government bonds, equity, etc., Investors are allowed to allocate their investments according to their risk appetite.

NPS Pension Calculator

An investor can choose between investing automatically or actively. Investing in the automatic mode is automatic while investing actively requires the investor to choose which assets they wish to invest in.

Depending on the investor's age, lock-in periods vary because the scheme matures when an investor reaches retirement age. This scheme offers tax-free interest, and if you receive the lump-sum payment at maturity, 40 percent of it is tax-free. The amount is taxable for those who choose to receive the pension post-maturely.

Real estate

Media reports and studies conducted by real estate agencies in India suggest that India's real estate sector has yielded an average return of 10% for the last ten years. A home purchase requires a considerable amount of money, ranging from a few lakhs to a few crores.

The RBI's House Price Index, which collects information on house prices across 10 cities, shows that homeownership has provided an average return of 11.6% for the last decade. As of October 2020, the index shows India's average return. However, since the level of property prices significantly differs by city, the return on investment will vary by city.

The returns may appear to have beaten inflation. However, there are many things to keep in mind when it comes to real estate. To start with, buying real estate is an expensive process. Most people will need a loan to purchase real estate.

The returns should compensate you for the interest you pay on the loan and all other additional costs you incurred to get the property in the first place.

It is generally possible to recover all loan interest charges and other costs incurred in purchasing the property when you sell it. All costs associated with the property purchase, including interest, will be recovered when you sell it.

Long-Term High-Interest Bonds

Interest rate changes affect long-term bonds the most. An investor who purchases a corporate bond, for example, is buying a portion of this company's debt. The fixed-income nature of bonds explains this. A bond with a specific maturity date, a periodic coupon payment schedule, and the amount or principal of the bond is included in the issue.

Inflation-Indexed bonds

The government issues inflation-indexed bonds through the RBI, among the most effective and secure ways to combat inflation. Inflation-indexed bonds are among the bonds issued through the RBI by the government. Unlike other bonds, this bond adjusts its principal amount to reflect inflation, and interest is credited to the adjusted principal amount.

Here's an example that may make it easier for you to understand how it works.

Consider an inflation rate of 10% at the end of the year. The interest rate on your Rs. 100 bond is 8% per year. The interest on a normal bond would be Rs.8 at the end of the year. Inflation-indexed bonds, however, are adjusted for inflation, so their principal would be Rs. 110. Additionally, 8% would be paid to the investor, so the bond was worth Rs. 8.8.

Article Summary

Depending on how long inflation lasts, it affects different people. Moreover, inflation is not a new socio-economic phenomenon. Throughout history, various market strategies have been developed to combat inflation. 

The causes of inflation can generally be categorized as " demand-pull" and " cost-push". Even if you can beat inflation, managing your portfolio to keep up with inflation requires adjustments over time.

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