Basics of Stock Market - Beginner

Inflation and investment

You should be aware of the pros and cons of investing, especially in stocks. Let's look at the effects of inflation on stock markets and how to invest in assets that will likely give high rates of returns. This will allow you to generate income that can be used to help achieve your financial goals and beat inflation. It is important to not be afraid to invest in stocks due to the inflation impact. Instead, learn how to combat this effect using stocks and other assets.

What is inflation?

Inflation refers to an increase in the prices of goods and/or services in an economy. As an investor it is important to understand what inflation means, and how it affects savings and investing. With time, the value of money declines and you can't buy what you bought today at a certain price tomorrow.

Investors should be aware of the nominal rate of return and the real rate of return. The nominal rate is the rate you receive that isn't adjusted for inflation, while the real rate is what is used to calculate the effective return after it has been adjusted for inflation.

Inflation can decrease the value money. You should learn how to overcome it by choosing investment options that provide higher returns and are capable of beating inflation.

Calculate the real rate of return using this formula:
Real rate of return = (1+Return/ (1+Inflation)-1

If the bank FD returns 7% per annum and inflation hits 5%, then your real rate of return will be 1.9% due to inflation.

Inflation and investment:

Bank deposits:

Inflation can cause savings, especially bank fixed deposits, to suffer. Bank FDs seem the most secure and we tend to save our money there. However, inflation can reduce the value of our savings. Let's take an example to illustrate this. You have Rs. 500 in your bank account. Your savings would grow to Rs. if you earn 5% interest. 525 If inflation rate is 10%, the price of an item that was Rs. 525 would increase by 10%. 500 would be Rs. Now, it is 550 Despite the rise in investments, you will have to spend more because of inflation. You can also call it a negative rate of return. The real return on investment gets reduced at the time of inflation.

Fixed income instruments

Your investment in fixed-interest rate bonds decreases as inflation rises. You can overcome this by investing in bonds that have been adjusted for inflation.

Retirement products:

When calculating your retirement budget, it is important to adjust your current expenses to reflect inflation. This will allow you to calculate the cost of retirement. Inflation means that the amount you have set aside for retirement must be increased in order to keep up with it. If the returns are too high, the savings required to fund your retirement will be reduced.

There are ways to combat inflation
Start investing in mutual funds/shares.
Inflation can be beat by investing in shares or equities. You can also invest in SIPs (Systematic Investment Plan) over a longer period of time. This will allow you to fight market volatility and inflation. Companies that are fundamentally strong will be able to combat inflation and start generating profit. Therefore, it is important to invest in these types of companies. Many mutual funds offer high returns that are sufficient to combat inflation.

Invest in commodities:

As inflation is a hedge, you can invest in metals such as silver and gold. Investors turn to gold as a safe haven when the currency's value falls. You can also invest in ETFs that deal with gold.

While no one can prevent inflation, they can plan and invest in the right investment avenues. Diversifying investment can also help to combat inflation. 

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