Inflation – how to tackle it

One of the most repeatedly asked question by anybody is – how to tackle this devil which has grown in gigantic proportions?

Most people are unaware of what it is and how it affects them but one thing is for sure, the media has beamed this bad news so continiously that people are more scared than ever. Worse is the situation when we dont know what we are scared off!!

Inflation is simply put as excess money in the country which is chasing few goods. This could be because of prouduction not sufficient or because of too much money with people – net result is the purchasing power of rupees comes down – this is something everybody understands!

Inflation is a essential devil. 3% to 4% is essential for the economic growth of the country but 11% to 14% as of now will hurt the poorest of the poor by reducing their purchasing power while their incomes dont raise proportionately.

The poor man tightens the belt, luxury items are no more purchased, essentials are rationed and the comman man will suffer.

If there is some savings – the retired people etc who have invested in risk averse things like bank FD’s are in for shock as they get negetive returns. Actually the interest paid on FD’s is to give atleast 2% over and above inflation so that your capital remains intact. What reteired people think is that my capital is intact and am living off on the interest portion – WRONG!!!

In current scenario when inflation is at 12% to 14%, your bonds/ FD’s dont give more than 9.75%. This difference is called negetive growth and if it continues for more than 2 years, its a dangerous situation.

So what should common man do for all these – more so the retired people?

Industry experts point out that Gold was one time tested hedging mechanisum but historicaly in the last 20 years, this has not provided very good results. In fact its too much of a risk for common man to purchase, store and sell the same.

Equities are the only life saving mechanisum to beat this devil called inflation. At times of inflation, the corporates increase the cost of products and pass it on to the consumer. But as a owner of the concern you would also be protected as growth would be in line with inflation.  Choose a mutual fund ( balanced one) so that you invest systamatically initially.

RISK is something that needs to be taken for the long term. A pensioner is advised to part 80% in fixed income instruments but 20% should be in equities commited for 7 to 10 years. The growth of this 20% in equities should make the average man break even.

Modern times bring on modern risks and knowledge of the correct nature is imperative to sustain!!

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7 Responses to Inflation – how to tackle it

  1. Tim Ramsey says:

    I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.

    Tim Ramsey

  2. […] Inflation – how to tackle it Inflation is a essential devil. 3% to 4% is essential for the economic growth of the country but 11% to 14% as of now will hurt the poorest of… […]

  3. praneshachar says:

    nice topic opt for the time and very realistic and practical approach how to tackle particularly for middle class people. Thanks Finance Guru Mohan you are a genius keep advising ( obviously free) what is your expectation when this will come down looks like we are paying heavily for basic needs like gas, groceries, vegetable fruits etc., all prices are simply on raise god only should save us from shaving from govt.

  4. Veena says:

    That was a very simple and neat update on Inflation.

    Mohan, Earlier I used to identify as Middle class perso.. but now I think I should go request the govt to give me BPL card if the inflation increases at this rate and I sit and enjoy my leaves with no pay 🙂

  5. Veena says:

    and all my savings go and fill up those SIP’s and EMI’s which I started some two years before.

    Banks should give us options for postponing out EMI’s and SIP’s when we don’t draw salary! Is there any workaround for these??

  6. Praneshachar,
    Sir, no genius stuff. If somebody just reads the web, these information is out there. I have just represented the same. God is expected to save this country from high inflation automatically in about 30 to 40 weeks!!

    Veena,
    Thanks. You are 100% right about BPL card but the stuff given for those people are only fit to be eatan by cows – only plus point is the 2 liter kerosene per week!! EMI’s are beneficial which started 2 year back because your interest is still at 7%-9% while the current lending rates are touching 12%-14% so something to smile about,

    Also your SIP’s are worth it. Just check your SIP investments after 3 years – you will be thanking god that you had good sense to continue the SIP – they will definetly buy you very good equities at low rates of today.

    You can stop SIP but no chance with EMI since you have to pay up everything upfront then.

  7. Veena says:

    Thanks for the long reply… Hmm.. SIP investments and the units rock and roll these days and I don’t look at the figure for the safer side!! Uh!!

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