How to Beat Inflation with Mutual Funds and Grow Your Wealth
26 March, 2025
Synopsis
Inflation affects daily lives by reducing purchasing power, raising living costs, and increasing the cost of borrowing.
To tackle this, it will be beneficial to invest in high-return generating assets such as equities, real estate, gold, and mutual funds.
Mutual funds, primarily equity-focused and managed by professionals, will give you diversification benefits, and higher returns, which help you beat inflation and maximise your long-term wealth.
Think back to your favourite snack a year or two ago. Not only has its price likely increased, but the quantity may have decreased, too. The same is true for everyday items like milk, biscuits, and chocolates. This steady rise in prices is called inflation. While it may seem small at first, inflation significantly impacts your savings and reduces what your money can buy over time.
Investing is one of the most effective ways to protect your purchasing power and counter the effects of inflation. Like saving for unexpected expenses, investing can safeguard your future finances. Let’s explore how inflation works and how mutual funds can help.
What is Inflation, and how does it Affect your Life?
Inflation is nothing but a consistent price rise over time. Imagine it as a tiny mouse eating away at a sack of rice each day. It might not be visible at first, but left unchecked, the mouse will finish the entire sack. Like this, inflation eats your wealth by slowly eroding the value of your money, which reduces your purchasing power and affects your savings.
It’s Impact
Higher Living Cost: Your day–to–day expenses, like utilities, groceries, and rent, become more expensive.
Reduced Purchasing Power: With reduced purchasing power, the same amount of money buys less over time.
Saving Deterioration: Money saved will lose value if it does not increase more than inflation.
Investment Value Decline: Some investments will not keep pace with inflation if they do not get high returns.
Increased Cost of Borrowing: Inflation leads to high interest rates, making loans more expensive.
Retirement Concerns: The money you need at retirement increases with rising inflation. This means more savings are required to maintain the same lifestyle.
What are the Ways to Beat Inflation with Investment?
Equities and Equity Oriented Mutual Funds: Direct equity investing or through professionally managed equity mutual funds gives high long-term returns, significantly outperforming inflation over time.
Real Estate Investment: This investment path is also considered good among Indian investors, as it protects against inflation.
Commodities and Gold: Investing in gold becomes stable as it retains value during inflationary periods.
How can Mutual Funds beat inflation?
Investing via mutual funds will be beneficial for the long term. Equity mutual funds, in particular, provide higher returns, which helps you beat inflation. Under an Equity mutual fund, the pool of money is collected by fund houses and invested primarily in equities or stocks.
Benefits
Diversification: Mutual Funds invest in various stocks, helping spread risk and diversify your portfolio.
Professional Management: Funds are managed by an experienced fund manager. Their investment style is backed by thorough research and analysis.
Higher Returns: Gives you a higher return than depositing in FD or saving in traditional options.
Tax Efficiency: Certain mutual funds offer tax-saving benefits that increase your overall return.
Liquidity and Flexibility: Mutual Funds provide the flexibility and liquidity to enter and exit the market easily.
Inflation silently reduces the value of your money, like a slow theft that goes unnoticed until it’s too late. While saving is important, placing your money in low-return options will eventually diminish your wealth. To grow and protect your savings, consider investing in assets that outpace inflation, like mutual funds.
For example: Let's consider a scenario:
Imagine you have ₹1 lakh to invest and are considering different options:
Option 1: A typical savings account might offer around 3-4% interest
Option 2: A fixed deposit might offer around 6-7% interest
Option 3: An equity-oriented mutual fund
Let's assume inflation averages about 5-6% annually. In this scenario:
With Option 1, your money might grow slowly, but likely at a rate lower than inflation
With Option 2, your money might roughly keep pace with inflation
With Option 3, equity-oriented mutual funds have the potential to outpace inflation over the long term
This comparison illustrates how different investment choices might perform relative to inflation. While past performance is not indicative of future results, equity-oriented mutual funds may offer potential for growth that could help address the impact of inflation over time.
Remember, mutual funds are not just about growing your money - they also help safeguard it from inflation's effects. Before investing, evaluate your investment appetite and choose the right fund accordingly. To start protecting your hard-earned money from inflation, download the HDFC Bank SmartWealth App from the Play Store or App Store today.
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