Don't let inflation burn your wallet!

That dreaded virus known as “inflation” has attacked us again! But this time round, Governments and Central Banks across the world will take some time to bring things under control. While the authorities do their bit, you need to do yours. Here are three areas of your finance that will be affected:

1. Your monthly budget
2. Loans
3. Investments

Virus attack
The escalating prices that have upset your budgets could kill your appetite, too! Maybe reworking your budgets around the new prices could make things a little easy for you. This is what people across the world are doing and you could follow suit:



Buy in bulk from wholesale markets.
Change your cooking style to consume less oil and gas.
Ignore costlier branded clothes, shoes etc, for a while.
Walking is good for health and saves you money. Drive less; save on petrol!
Save electricity by drying clothes in an open terrace, not in the dryer.
Save about 25-30% by making pizzas at home.
Catch the matinee shows; they are cheaper.

Killer EMI
The economic boom in the last three to four years brought with it a double-edged sword called ‘Loans’.

Suddenly you were swamped with easy and cheap loans. It helped you acquire your dream house, dream car, dream vacation etc. But due to inflation, this dream has turned into a nightmare.

Now, that higher interest rates are looming over your head, it would be wise to pay off your loans. If you don’t have the cash to pay off the full loan amount, you could pay off a part of it, even if you have to sell off other investments.

You could also go in for an increased tenure instead of increased EMI. This would mean higher interest payout, but at least the monthly cash flows will be more manageable.

Try to maximise the post-tax returns. For instance, a 9% return on Bank FDs may look good, now. But if you were in the highest tax bracket, your returns would be only 6-6.3%. Instead, you could look at Fixed Maturity Plans (FMPs), which will fetch 8-8.5% post-tax returns.


Equity investments

Returns from equity (shares, equity mutual funds, Equity Unit Linked Insurance Policies) are dependent on the performance of the companies.

1. Work out how inflation will affect the company’s performance, ie, does it suffer from the rising cost of inputs? This analysis will help you understand the impact of inflation on the company and the share prices.

2. Inflation will slow down the Gross Domestic Product (GDP) growth rate, which was above 9% in the last few years. Lower growth rate means lower profitability and hence lower share prices.

3. If there is less demand for shares, it could dampen the prices. This will, in turn, shift the focus towards debt instruments with higher risk-free returns.


Should you exit from equity? No. Instead, you need to have a long-term view on equity. You can draw comfort from the fact that even with 4-7% GDP growth rates in the last 15 to 20 years, the markets averaged a return of 15-16% per annum. It's reasonable to expect 15-20% returns over the long-term. The key is patience. So, pull up your socks and face the beast with gusto!