Back

Next

How to beat inflation. 3 investment tips

April 23, 2008

What is inflation?

First let's understand exactly what inflation does to you or to put it more precisely to your money.

Let's assume you could buy 1 litre of petrol for Rs 10 (1 litre = Rs 10). As crude oil supply turns volatile, petrol prices rise.

Now 1 litre of petrol no longer costs Rs 10, it has appreciated to Rs 12 (1 litre = Rs 12). In one stroke the purchasing power of the rupee has fallen from 1 litre = Rs 10 to 1 litre = Rs 12, or to put it differently the real value of your rupee has fallen.

In other words, the Rs 10 that used to get you 1 litre (1 litre = Rs 10) will now get you 0.8 litre (0.8 litre = Rs 10).

As an investor, you must invest in a manner so that the return on your investment compensates you for the falling value of the rupee and still leaves you with considerable surplus.

In financial parlance this is referred to as the 'real return on your investment', i.e. return after factoring in inflation.