Is Inflation eating your returns?

By | June 10, 2018

Inflation is defined as a sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. Put differently, as inflation rises, every rupee you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation.

Many developing countries use changes in the consumer price index (CPI) as their central measure of inflation.In India CPI (combined) is declared as the new standard for measuring inflation (April 2014)  CPI numbers are typically measured monthly, and with a significant lag, making them unsuitable for policy use. India uses changes in the CPI to measure its rate of inflation.

Historic inflation India (CPI) – This page features an overview of the historic Indian inflation: CPI India. The inflation rate is based upon the consumer price index (CPI). Two overviews are being presented:

  • The annual inflation by year for India – comparing the December CPI to the December CPI of the year before and after
  • The average inflation by year for India – the average of 12 monthly inflation rates of a calendar year

 

Year Inflation  Rate
 CPI India 2017 4.00
 CPI India 2016 2.23
 CPI India 2015 6.32
 CPI India 2014 5.86
 CPI India 2013 9.13
 CPI India 2012 11.17
 CPI India 2011 6.49
 CPI India 2010 9.47
 CPI India 2009 14.97
 CPI India 2008 9.70
 CPI India 2007 5.51
 CPI India 2006 6.53
 CPI India 2005 5.57
 CPI India 2004 3.78
 CPI India 2003 3.72
 CPI India 2002 3.20
 CPI India 2001 5.16
 CPI India 2000 3.48
 CPI India 1999 0.47
 CPI India 1998 15.32
 CPI India 1997 6.29
 CPI India 1996 10.41
 CPI India 1995 9.69
 CPI India 1994 9.47
 CPI India 1993 8.64
 CPI India 1992 8.00
 CPI India 1991 13.07
 CPI India 1990 13.71
 CPI India 1989 5.42
 CPI India 1988 8.79
CPI India 1987 9.31
CPI India 1986 9.21
CPI India 1985 7.14
CPI India 1984 5.19
CPI India 1983 12.46
CPI India 1982 8.05
CPI India 1981 12.73
CPI India 1980 9.09
CPI India 1979 11.70
CPI India 1978 1.51
CPI India 1977 7.86
CPI India 1976 0.00
CPI India 1975 -6.18
CPI India 1974 25.40
CPI India 1973 23.81
CPI India 1972 7.66
CPI India 1971 4.89
CPI India 1970 5.01
CPI India 1969 3.54
CPI India 1968 -2.23
CPI India 1967 8.60
CPI India 1966 13.94
CPI India 1965 5.49
CPI India 1964 17.01
CPI India 1963 6.87
CPI India 1962 2.48
CPI India 1961 3.21
CPI India 1960 0.00
CPI India 1959 4.23
CPI India 1958 5.15

Over all average inflation rate stands at 7.5% per year. What it means any investment we make if the return from it is less then 7.5%(on a long run) then we are losing money in that investment.

Take an example of bank Fixed Deposit(FD) , these days most of the banks are paying 6-7% returns on FDs and returns are again taxable, so if a person is in 30.9% tax slab then he needs to pay 30.9% of the interest he/she earned. After taxation overall return becomes 4.8% which means the person is losing money at the rate of 2.7%.

To avoid tax on the returns one can make FD on the name of family member who’s not earning or earnings + returns from FD don’t make his/her earning taxable. But still there is a loss of 0.5%.

FDs were there in the common man’s portfolio since ages, as its one of the safest investments, but as we saw above FDs are not very good investment if the returns from them are less then 7.5%.

PPF which gives 7.6% returns where investment and returns both are tax free or VPF which give 8.75% returns and in VPF also investment and returns are tax free. Both PPF and VPF are better option then FD on a longer run.

PPF and VPF are better than FDs when it comes to safe, guaranteed and tax free returns, Both of these options do have long locking period in compare to FDs.

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