Sip - Systematic Investment Plan
The real rate of return is the inflation-adjusted return that one gets by putting money in investment products like bank fixed deposits, equity mutual funds , gold or real estate. For eg.,if i keep Rs 10,000 in an FD that gives 9% annual rate of interest, at the end of the year i will get Rs 10,900. But, if the rate of inflation during the same period was 10%,i.e., the rate of interest is lower than the rate of inflation, at the net basis I am losing 0.9%,
i.e, my real rate of return is=1.09/1.10-1= -0.9% .
In other words, what i can buy with Rs 10,000 today will cost me Rs 11,000 at the end of the year but my Rs 10,000 in bank FD will grow to just Rs 10,900,thus leaving me with a shortfall of Rs 100.And if I am paying income tax, that is I am in the tax bracket, then after paying for my taxes on the interest from the FD, my actual return would be even less.
If I have put my money in FDs to take care of financial needs in future, I will find it increasingly harder every year to meet expenses with the returns from the FDs. In such a situation, I will have two options: shell out more to continue to have the same lifestyle or cut down on the expenses, which means compromising on the standard of lifestyle.
If I want to meet future financial needs, I should be concerned about beating the inflation in the long run. So my decisions should be based on inflation-adjusted rate of return and not on the nominal rate of return. Investors are more concerned about the loss of capital in the short run, but inflation is a bigger risk in the long run, which remains invisible a silent killer. If they understood how inflation affects returns from their investments, not so much money would go into debt instruments.
Financial planner, advisors and investment professional say although most Indian investors put their money into debt, gold and real estate, in the long run returns from debt barely give positive inflation adjusted return, while returns from gold are only slightly
i.e, my real rate of return is=1.09/1.10-1= -0.9% .
In other words, what i can buy with Rs 10,000 today will cost me Rs 11,000 at the end of the year but my Rs 10,000 in bank FD will grow to just Rs 10,900,thus leaving me with a shortfall of Rs 100.And if I am paying income tax, that is I am in the tax bracket, then after paying for my taxes on the interest from the FD, my actual return would be even less.
If I have put my money in FDs to take care of financial needs in future, I will find it increasingly harder every year to meet expenses with the returns from the FDs. In such a situation, I will have two options: shell out more to continue to have the same lifestyle or cut down on the expenses, which means compromising on the standard of lifestyle.
If I want to meet future financial needs, I should be concerned about beating the inflation in the long run. So my decisions should be based on inflation-adjusted rate of return and not on the nominal rate of return. Investors are more concerned about the loss of capital in the short run, but inflation is a bigger risk in the long run, which remains invisible a silent killer. If they understood how inflation affects returns from their investments, not so much money would go into debt instruments.
Financial planner, advisors and investment professional say although most Indian investors put their money into debt, gold and real estate, in the long run returns from debt barely give positive inflation adjusted return, while returns from gold are only slightly