India is a country with more than 50% population are middle class,

Being one, I’ve observed my parents are prudent in terms of financial planning, they try to avoid all sort of risks and prefer to be conservative.

I really appreciate them for their discipline in terms of saving because that has paid off a great education for us(for me and my sister).

But the flip side is their generation financial literacy is very less for several reasons.

They did a pretty good job in savings but they are not aware of hidden potential problems in it.

But today we are in the digital generation, internet has penetrated like anything,

With that help of that, I thought of bringing it to your notice to make you,

Understand the impact of inflation on investment with practical examples and

I’ve discussed few investment options to stay financially healthy in the long run.

investment options

Are you active in Personal money management?

Till college, we were financially dependent,

I remember it was two years ago, that is 2-3 months after college got over,

I was preparing for CFA Level 1 exam and many of my friends have started their job.

It means they have become financially independent.

I was bit curious to know what they did with their salary.I’ve asked them shamelessly.

Answer was pretty common few were paying off the loans, few were taking care of part of family expenses, in addition to that managing their own expenses as well.

That’s good to know because people have become quite responsible ,able to manage of their own and started supporting their family financially.

But deep inside one thing has kept on bothering me.

Being from a finance background I think I’m hard-wired to think in this way.

Let me share my thoughts on it,

Speaking about the savings and investment part,

People are less active in personal money management area,

Heard of this warren buffet quote “Don’t save what is left after spending but spend what is left after saving”

This might have given better perspective on what I am talking about.

Hardly people around me spoke about savings and investments,

Few of them told they have started saving in the Fixed deposit and Recurring deposit(Sounds good)

Very few of them told they have started investing in mutual funds, trading directly in stock market. (Quite impressive)

But many of them told they kept their salary in the savings bank account, (Which is not financially good in the long run)

I’ve put people in two groups in terms of making their financial plan,

1)People are busy and have no time to think about it.

2)People have given thought about it and doing it to their capacity but looking forward to make it more effective.

If you’re in the first group, read till the end to know the potential problems of not making a effective financial problem

If you’re in the second group , Congratulations!! You’re in the right place.

Impact of inflation on investment
Image by Alexas_Fotos from Pixabay

What is inflation with example:

How to work on for effective personal financial plan in the long run?

For that you have to understand this simple concept from the economics.

Don’t be scared, if you are not from commerce background, neither do I.

So I tried simplifying it for your understanding.

What is inflation….Heard of it?

Which means price of goods and services will increase over the period of time.

Few of them might be aware of this already, few might be thinking, heard of it but not bothered much about it.

See the historical inflation rate in India,

How this is affecting you and me,

We will understand inflation with simple example,

If you see the inflation rates in India are 3.4% ,4.5% for 2018 and 2019 respectively and estimated rates are 3.3% and 3.6% for the future,

For the ease of understanding and calculation, assume inflation rate will be 4% for next 5 years,

Example: Imagine for a moment you are buying 1kg Onion +1Kg Potato + 1Kg Tomato for Rs.100 today.

In 2025, that is in 5 years for the same (1kg Onion +1Kg Potato + 1Kg Tomato) you would be paying Rs.122 due to inflation, each year there will be 4% increase in price of goods and services that we consume in day to day life like house rent, transportation expenses, groceries, apparels, education expenses and in other similar things.

This is for understanding purpose, I hope you got the broader picture.

On the other side you are getting salary, after all your expenses and liabilities are met, what’s happening to the remaining money,

Option 1: You’re busy and didn’t find much time to think about it, so just left in the savings account itself.

Option 2: You might be depositing in the bank and get “guarenteed” returns

Option 3:  You might be Investing in assets like gold, real estate, mutual fund, stocks and grow the money.

personal money management
Image by TheDigitalWay from Pixabay

Investment Options to beat inflation:

Let’s discuss one by one,

Option 1,

How much do you earn in a savings account :

Imagine you got your salary, as you’re busy you just left it in the savings account itself.

I would like to continue with same example to make it easy for understanding,

Assuming Rs.100 is remaining in the bank savings account after all your expenses and liabilities are met

Since that is left in the savings account, bank will offer a very low-interest rate of return.

Assuming you are an account holder in the “Bank for every Indian” that is in SBI.

It offers 2.75% interest for one year …If you left the money in a Savings account, in the next five years Rs.100 would have become Rs.114.

By looking that we can say Rs.114 in 5 years doesn’t hold the same value of Rs.100 in today’s value.

Remember the inflation example (1kg Onion +1Kg Potato + 1Kg Tomato today’s price is Rs.100),In 5 years the same amount of goods will be Rs.122,

See Rs.100 in your hand today is enough to buy all the vegetables but if you left it in the Savings account for the next 5 years then you can’t buy the same amount of vegetables at that time with this amount.

Money in your hand is grwoing at 2.75% but price of goods and services around you is increasing at 4%. 

Technically, you are not earning any return, its negative 1.25%. In long run, inflation will have a effect on your saving which won’t be obvious to notice.

If you aren’t aware of this before I strongly recommend you to think about it and take decision after that.

Savings account
Image by Steve Buissinne from Pixabay

How inflation affects Fixed deposit:

Option 2:

Assuming you are a type of person who is highly risk averse, conservative, prudent and loves the word “guarnteed” “assured” return like my parents.

Again assuming you are a account holder in the “Bank for every Indian” that is SBI.

No personal bias towards the bank, it is coming automatically because this is the only bank I’m holding an account for last 6 years.

SBI 5-Year Fixed Deposit rate is 5.4% which means if you deposit Rs.100 today, in the next 5-years you will get Rs.130.

Remember the inflation example, (1kg Onion +1Kg Potato + 1Kg Tomato) today’s price is Rs.100 , In 5 years the same amount of goods will be Rs.122,

If you see in the absolute terms you get only 8 rupees due to inflation (not 30 rupees).

Bank gives you 30 rupees but inflation eats up 22 rupees.

Real return is just 1.4% [Which is calculated as Bank deposit rate(5.4%) – Inflation rate (4%)]

This is a rough calculation just for your understanding, hope you got the braoder pictrure.

Take away point: Return from FD is slightly higher than inflation, but in real return terms it is marginal in nature.

impact of inflation on investment
Image by Steve Buissinne from Pixabay

How about Option 3,

Assuming you’re a type of person who are less risk-averse compared to the above category, expecting to grow the money in an efficient way within your risk appetite level. 

You might be interested to Invest in assets like gold, mutual fund, stocks etc.

Gold investment returns in India:

Gold is a classic asset even my parents who are highly risk averse like to buy it.

But wait for a moment, are you buying gold as a investment or in the form of jewellary.?

Because in jewellary it’s quite complex to figure out the returns, there are hidden charges like making charges, wastage charges and all.

I’m assuming people who perceive gold as a investment who invest in it digitally or may be bought as coins.

Speaking about the historical gold prices in India,

historical gold prices in india

In the above table, I’ve fetched the price of gold for respective years from google.

In 2001-2010 decade, there was a steep increase in the price. [5x increase of price in 10 years] which is massive.

After that price was flat, gradually increased for next 5 years. (2011-2015).

In the last 5 years, there was a decent upward price movement, especially in the past 6 months there was a good rally see 13k increase in last 9 months.


Speaking about the return from gold investment,

For the last 4 years, yearly rate of return is 12.5%. (2016-2019)

For the last 9 years, yearly rate of return is 8% (2011- 2019).

Remember the inflation rate in India  which we have discussed above, somewhere around 4%.

Investment in gold would have beaten inflation with big difference.

Seems better investment opportunity right.?


Yes it does, but according to warren buffet, he told “Don’t put all your eggs in one basket”

So we can’t rely only on gold to grow the money, as there are tons of factors to drive the price.

Bottom line: Consider digital gold investment or buy as coins to diversify the portfolio.

digital gold investment
Image by Omar Hadad from Pixabay

Mutual funds return:

“Mutual fund investments are subject to market risk so read the document carefully before investing”

This is the discalimer we keep on hearing from different media channels when they advertise any mutual fund schemes.

If I start speaking on that I’ll end up writing the same length of what you have read already.

So I’ll reserve it for some other day.

Sticking to the topic, as we have discussed the returns of other investment class, we’ll do it for Mutual fund and see how much return it generated more than inflation.

Mutual funds are broadly classified as Equity Mutual fund and Debt mutual fund.

Equity Mutual Fund is further classified into bluechip funds, large-cap, mid-cap, small-cap funds.

In general, considering the diversification Equity Mutual Fund has generated 5 year-CAGR ( yearly return) of 10-12% in the past 5-years.(2014-2019).

This is based on average, many funds have generated more than 12% and , less than 10% even negative as well.

It all depends on the selection of funds and how effectively it’s managed.

Debt funds on average has generated 5 year-CAGR ( yearly return) of 7-9% in the past (2014-2019).

Remember the inflation rate in India  which we have discussed above, somewhere around 4%.

Investment in mutual fund would have beaten inflation with very big difference.

Bottom line: Consider Investing in mutual funds will maximize the returns and diversify the portfolio.

Mutual funds return
Image by Nattanan Kanchanaprat from Pixabay


I know it’s a lot of information, It will take some time to process.

Give some time and carefully think about it because it’s your hard-earned money,

To stay financially healthy in the long run, you have to be discipline,spend some time to understand the things around us, and build a growth oriented mindset to invest.

Happy financial planning!

Love to hear your thoughts, let me know if you find it useful.

I would more happy if you bring it to my notice that any explanatory part can be improved. 

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