How to beat inflation

In simple terms, inflation is defined as the rate at which the general level of prices of goods and services is rising, and consequently the purchasing power of money is decreasing. (investopedia.com) The impact it makes on your investments is however is not as simple and is in fact a powerful instrument which reduces the money in your pocket, even if you don't spend anything at all.

I can remember that we used to pay Rupees 108 for a 3 minute call from Mumbai to Delhi, which is now Rupees 1.20 for 3 minutes if you are calling from MTNL to MTNL. Even the first Desktop PC which I purchased was a poor 386 and had cost me upwards of Rupees 75 thousand. But these are the only two things which have become cheaper. I cannot name a single other thing which has become cheaper. From 1999 to early 2008, the inflation rate used to be a decent 4% p.a. or thereabout. But after early 2008, it has taken a quantum jump to reach about 13% p.a. in August 2008. In July 2010 it was howering around 11.25% p.a. after touching an all time high of 16.22% p.a. in Februay 2010.

At present the banks are offering an interest rate about 7 to 7.5 % p.a. on your fixed deposits, while the year's average inflation rate at about 12 % p.a. is well above the rates offered by banks on deposit. For a layman what this means is that if he keeps his Rs. 10000 in a bank deposit, he will get interest of say Rs. 750, but at the end of one year his money will be Rs.10000 plus interest Rs.750 divided by 1.12 or Rs.9600! Thus without doing anything, he has lost four hundred Rupees! I am even assuming that he does not pay tax and if his income was taxable, the damage would be more severe. If instead he keeps his money safe in his locker, by year end it would be worth Rs.8900


The idea is not to scare you, but to show you that unless you do something drastic immediately, you are going to continuously lose money. It would be clear that unless you get a return higher than the inflation rate, you will keep losing. Is there an avenue where one can park his money and without much monitoring, it will give him a decent return, say 15% p.a., compounded? Or 20% p.a.?

There certainly exist avenues and several ones!

Consider this: The SENSEX has delivered a compounded annual return of 19% p.a. over last five years. But investing in equity is highly risk prone since it needs constant monitoring and some expertise to understand the impact of day to day happenings on share markets in general and your own portfolio in particular. On the other hand, if you leave all worries to the fund managers, you will find that among the diversified equity schemes of mutual funds there are as many as 61 schemes which have beaten SENSEX by margins from 0.1 % to 11.0%. Yes, there are schemes which have delivered compounded returns of over 29%.

This however does not mean that you should withdraw all your bank deposits and rush to a mutual fund advisor. At present, the Indian Share Markets are one of the priciest ones and the PE ratios are going through roofs. The safest way at any time is to invest in Mutual Funds through the Systematic Investment Plan route.

Are there any schemes which I would like to recommend specifically? Yes of course!
Here is your list of best performing MF schemes on a 5 year track record: (Source: moneycontrol.com) (Numbers in bracket are percentage compounded annual returns over 5 years. September 2005 to August 2010)

1. IDFC Premier Equity Fund Plan A (29.9)
2. Reliance Regular Savings Fund Equity (27.8)
3. HDFC Top 200 Fund (26.7)
4. Sundaram Select Mid-Cap Fund Retail Plan (26.5)
5. HDFC Equity Fund (26.5)

Happy investing!

Disclaimer: I am not a Certified Financial Planner and you need to consult one for a complete assessment of your risk profile before you invest.