Inflation Impact on Investments
Personal FinanceInflation erodes the real value of investments. A 7% FD return during 6% inflation produces only 0.94% real return -- barely any growth. Understanding real returns (nominal return minus inflation) is essential for choosing investments that genuinely build wealth.
In detail
Real return comparison (assuming 6% inflation, 30% tax bracket):nSavings account (3.5%): post-tax 3.5% (no tax on first Rs 10K). Real return: -2.4% (losing purchasing power)nFD (7.5%): post-tax 5.25% (30% TDS). Real return: -0.75%nPPF (7.1%): tax-free. Real return: +1.1%nEquity mutual fund (12% CAGR): post-LTCG 10.5%. Real return: +4.5%nNPS equity (13% expected): post-annuity cost ~11%. Real return: +5%nnOnly equity and certain equity-linked products consistently produce meaningful positive real returns over long periods.
Formula
Real-life example
Renu has Rs 10L in FD (7%, quarterly compounding). After 10 years: Rs 20,016. But with 6% inflation: she needed Rs 17,908 just to maintain purchasing power. Net real gain: only Rs 2,108 on Rs 10L invested for 10 years. Compare: equity SIP returns Rs 31,058 on same Rs 10L at 12% CAGR in 10 years. Real gain Rs 13,150 vs FD's Rs 2,108.