Know How Inflation Can Impact Your Savings and Investments

16-June-2021 |

Inflation can be understood as the reduction in purchasing power of a currency caused by an artificial increase in prices of commodities or poor economic performance of a region over a period of time. The decline in purchasing power inevitably leads to growing expenses due to the rise in prices of commodities relative to the earning of an individual, and this event can be dangerous for your savings.

The global economy is constantly faced with fluctuating rates of inflation, consistently increasing cost of living and the only way to ensure financial security is to ensure that your preparations surpass the effects of inflation on your financial condition.

Here we look at the impact of inflation on savings and how inflation-proof saving instruments such as physical assets like gold and market-linked investments such as a ULIP policy are crucial to preserving your earnings.

 

How inflation works

Inflation is fundamentally represented in the comparative analysis of commodity prices of the present as against price points in the past. When prices of the present are higher than those of previous years.

The increased price of the commodity does not necessarily translate into an increased income, which is where a disbalance between your savings and expenses appears. Money saved with the intention to achieve a certain financial milestone might not be enough as inflation keeps feeding on the capability of your savings to keep up with the rising costs.

Inflation is measured as the difference between the current price and the former price divided by the former price, and the increase in your savings should always be higher than the measure of inflation to be able to combat the effects of increased consumption expenditure.


How to protect your savings from the effects of inflation


To be able to protect your savings and investments from the effects of inflation, you need to account for the rise in consumer prices before preparing a plan to put your hard-earned money in any place.

To counter the effects of inflation on your savings, opt for plans that offer higher annualised returns than the ongoing inflation rate so you can compound your wealth beyond the cost of living. Investment instruments that offer higher rates of return are usually market-linked investments that represent the performance of the securities market into your returns.

Market-linked investments include stocks, hybrid funds, Unit Linked Insurance Plan or ULIP Plan and such asset classes that directly depend on the performance of the stock market, which has consistently outperformed other traditional investment options and even inflation

Unit Linked Insurance Plans:

Market-linked investments are known for ensuring a low level of control to the investors and are dependent on the market performance. Individuals looking for lucrative yet controllable market investment avenues can explore ULIP investment opportunities.

ULIPs bifurcate premium payment between life insurance cover and market-linked investments to help build a corpus for you with the added benefit of life coverage, along with reducing liabilities with deductions through ULIP tax* benefit

Tata AIA Life Insurance offers a slew of Unit Linked Insurance Plan to suit a diverse set of investment needs. Choose your plan and finalise the fund of your choice based on your risk appetite. With easy premium payment and a top-up facility, you can ensure a seamless investment experience.

Get in touch with us for more information on ULIPs.

 

Physical assets for investment:


Another class of investments that you can consider to outdo inflation is physical assets such as precious metals and real estate, which themselves are tangible commodities that are subject to an increase in prices that is caused by inflation, meaning when they increase in value, they counteract the effects of inflation almost in real-time

Precious metals such as gold and silver play a substantial role in India owing to their religious association and are thus, high yielding investments due to their perpetual demand and finite supply. Nowadays, equity traded funds (or ETFs) and bonds that are backed by precious metals can be acquired in the securities market. These alternatives are much more lucrative as an investment than physical items such as bullions, coins or jewellery, which require storage space and security provisions. The intangible nature of these instruments makes them an ideal substitute to reap gains without the drawbacks of physical holdings.

Real estate is another important investment that can help create financial and social security as well as generate significant returns for investors. Investing in property is a conventional pick, however, one of the safest assets to acquire. Historical returns on real estate value are remarkable, with land being a finite resource and populations soaring only to escalate demand. Accompanied by rental opportunities, real estate can also help supplement your income streams.

Final thoughts

It is important to understand the effects of inflation when preparing your savings and investment portfolio. To be able to achieve financial goals and attain financial freedom, inflation must be exceeded by the returns that you seek from places where your money is kept. Accumulating wealth is a complicated process achieved through mindfully planning and strategizing the use of money that you have earned.


Comprehensive knowledge of inflation rates and returns offered by various asset classes must be given due consideration before settling for a plan of action in order to ensure that your financial plan is future-ready and able to tackle the perils of inflationary events induced in the natural course or due to the emergence of an unplanned eventuality...

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  • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.

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  • THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.

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