To make sound investment decisions, you need to understand the true growth of your money after accounting for the rising prices. An inflation calculator helps determine your real rate of return from investments after factoring in inflation. In India, retail inflation has averaged 5-6% annually in recent decades. In some years, inflation has spiked significantly higher. As an investor, you must monitor inflation trends to maximize real returns.
Understand the impact of inflation
Inflation reduces the purchasing power of money over time. While your investments in top mutual funds may be growing in absolute terms, inflation eats into the real returns. To understand the true growth of your investments, you need to consider the inflation-adjusted returns. An inflation calculator helps you determine the real rate of return on your investments after factoring in the rising prices.
Look at the historical inflation trends
In India, retail inflation has averaged around 5-6% in the last few decades. In some years, inflation has spiked up significantly. For example, inflation was as high as 11% in 2013. In 2020, retail inflation has remained above the RBI’s target range of 2-6% due to the COVID-19 pandemic. As an investor, you must keep an eye on the past and current inflation trends to make better investment and financial decisions. See more : financial future
Use an inflation calculator
An easy way to calculate your real returns in top mutual funds is to use an inflation calculator. Several free online calculators are available to calculate inflation-adjusted returns in India. You need to provide details like investment amount, time period, and average annual return to get the inflation-adjusted real return. For example, if you invested ₹1 lakh in a fixed deposit in 2015 at an interest rate of 7% for 5 years, your maturity amount would be ₹1.4 lakh. But, after adjusting for average 6% annual inflation, the real return is only around 1.5% yearly.
Consider post-tax real returns
In India, interest from fixed deposits and bonds as well as capital gains from investments are taxable. So, you must consider post-tax returns while calculating inflation-adjusted returns. For example, if your pre-tax return on fixed deposit is 7% and you fall in the 30% tax bracket, the post-tax return would be 4.9%. After deducting 6% average inflation, the real post-tax return would be -1.1%. Hence, you are losing money in real terms after taxes.
Conclusion
An inflation calculator is a useful tool for getting clarity on where you stand financially after factoring in the loss of purchasing power from rising prices. With discipline and smart investing choices, you can make your money work hard for you and overcome the wealth eroding effects of inflation in the long run.
