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Inflation, silent killer of your money

“INFLATION” is the buzzword none of us wants to hear in any form, but we are forced to acknowledge its presence in one or the other way. Lots of people are worried about inflation.

However before we proceed further to deal with the menace of inflation, let us first understand its integral meaning in simple terms. “Inflation” is defined as a sustained increase in the general level of prices for goods and services. As inflation rises, every shilling or dollar you own buys a smaller percentage of goods or services.

The mute question remains as to what causes “inflation”? Although there is no single cause that’s universally agreed upon, but at least two theories are generally accepted: First one is the ‘Demand-Pull Inflation’ - this theory can be summarized as “too much money chasing too few goods”. In other words, if demand is growing faster than supply, prices will increase.

This theory would aptly apply during the period when the demand for goods and services is high. The second theory is the ‘Cost-Push Inflation’ - when companies’ production costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports etc.

Once you are educated on this avoidable creature called – “Inflation”, can we now concentrate on devising strategies to beat inflation? Mind it, it is easier said than doing. Savers will struggle to erode the effects of rising inflation as number of products that can beat inflation dries up.

You as an investor or saver have to work hard to identify certain investment products that can beat inflation. Savers hardest hit by the rise in inflation are those who rely on their savings to supplement their income, many of whom are pensioners and cannot make up lost spending power in future.

With interest rates on savings predicted to remain low, the future is bleak for this group. On a positive note, don’t be upset as there are some investment products which in the long run can surely beat inflation. So let us make a sincere attempt to find out such wonderful instruments of investment which can beat inflation in today’s parlance.

Some notable investment products falling under this category are as follows:

• Equity - the first soldier in the army fighting inflation is of course the ‘equity’. This instrument in many countries is known for generating a compounded annual growth rate of as much as 18-20 per cent on average. You can either enter the stock market directly or through the mutual fund route.

Invest directly only if you understand markets well else adopt the indirect route through unit trust schemes. Equity investments work best in the long run. Thus, to make the most on equity instruments, remain invested for at least 7 to 10 years. (2) Gold – this is one of most precious metals desired by all.

Tanzania is known for its Gold production. Thus if you invest in Gold, there is very less chance that its value will get eroded. Though the traditional way to invest is to buy physical Gold, however the best way to invest in gold is through gold exchange-traded funds (ETFs) or gold mutual funds. They are convenient, cheaper and there is no risk of loss or theft as associated with physical gold.

• Real estate – another popular avenue to beat inflation. Investment in real estate can be done through commercial, residential properties, land or real estate investment funds. However, there are certain factors you must consider before investing in real estate. It is not a liquid asset and involves lot of paperwork towards acquiring an asset.

Besides, there are various recurring expenses such as property tax, maintenance, deemed rentals, problems with tenants and periodic renovation. If you sell it, then depending on how you use and invest the proceeds you may have to bear the capital gains tax as well. Moreover, in the largely unregulated market, cases of fraud and title dispute are pretty common.

However, despite all this, it remains a preferred investment avenue and if chosen well, can protect the value of your asset from inflation in the long run due to its inherent feature of capital appreciation. (4) Systematic Investment Plans [SIPs] – these are plans where investors are required to invest a specified amount at regular intervals [may be on daily, weekly, monthly or quarterly basis].

In a rising inflationary economy SIPs come very handy in controlling the adverse impact of inflation on your savings, as you would always have some investments which were made when the inflation rate was low.

(5) Invest in Foreign Currency Funds – if due to inflation your base currency is depreciating continuously, then part of your savings can be parked into funds which are denominated in Dollar, Pound Sterling or any other strong currency.

So during the high season [when demand for a particular item is high], you need to ensure that you are charged the right price for any goods or services which you wish to avail. Just because the demand is high, the service provider can’t charge a price which does not represent the prevailing inflationary conditions in the country. So try hard to beat the inflation so that it does not kill your hard earned money.

‘Good bye Madiba, I will miss you ...

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Author: JAGJIT SINGH

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