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Shashank Shandilya .

Is Inflation just a number or affects you too?

Diesel and petrol prices are increasing on a daily basis and this will
result in inflation. Besides increase in logistics and transportation costs
related to essential items, inflation also burns a hole in the common man's
pocket by bringing down real return from investments.

Typically, most investors only look at the numbers (percentage of return)
that investment products show and have a lack of understanding or ignore
factoring in the impact of tax and inflation.

While income tax is charged on the return from different products differently, inflation basically reduces the value of money or purchasing power. Real returns can be far lower than what the product shows after
considering tax and inflation, but it is the actual benefit that you get.

For instance: Bank FDs are currently offering around 5.1% interest per
annum. If an individual falls under the highest tax bracket of 31.2% (including cess of 4%) post tax return is reduced to 3.50% per annum.
Further, if we assume inflation of say 5% per annum, net return will translate into a negative figure of -1.50% (3.5% - 5%). In the long term, your savings and investments will shrink instead of growing. Ideally, it
makes sense to invest in a product only when real returns from it are
positive.
So Invest wisely!!!

Originally Posted Here
2 Comments

Shaju Nair

Inflation is not just the price of a particular commodity. When we say 3.5% inflation, that’s an index of a basket of consumer items, including petrol. If industry need to grow, inflation should be higher than bank rates or bank rates should be pegged lower than inflation. Only then people will start spending. But since lot of people survive on interest income, govts are not able to take that call.

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