Written by Awdhesh Nagar
In a shopping trip you come across a fabulous pair of shoes priced at Rs 2000/-. As a prudent spender you decide to defer your purchase for a year as you have sufficient stock and plan to keep this money in a safe instrument like bank deposit to use this next year for buying these shoes. You may earn around 6% on this deposit and at the end of year get Rs2120/- to buy the shoe.
But price of shoe has gone up and now available at Rs 2200/- you will have to actually spend another Rs 80/- to acquire the shoe after a year. You are at real loss of Rs 80/-
This is an example how inflation eats in to our return. Investor should look for real return not absolute return. Real return is return over inflation. If you get a return of 10% a year on your investment and inflation is 4% for that time your real return is 6% as your power to purchase has gone up by 6% (10-4) only.
A scenario where you earn 10% return with inflation of 5% is better then earning 12% with inflation of 8%. As real return in first scenario is 5% but it is 4% in second scenario. Apart from inflation tax also eats in to our investment returns. Therefore, while calculating real return deduct taxes and inflation from the return.
So if you earn 6% interest from deposit and pay 30% tax your absolute return is 4.2%. If inflation takes away another 4% from it you actually have earned real return of 0.2% only.
So next time while considering any investment look at post tax real return which increases your purchasing power. Don’t just keep money anywhere and loose its real value. Taxes and inflation are always eroding your wealth.
Awdhesh Nagar is an experienced banking and finance professional. He did his B.Com (H) from Sri Ram College of Commerce and MBA-Finance from University of Delhi. He currently runs his own organisation by the name ‘Moneylogist’ which advises more than 300 clients on their personal financial planning. He is on mission to improve financial literacy and responsible for financial well-being of his clients. He regularly visits education institutes as guest speaker and provides his views on budget and economic events on media.
Contact No 9873550471
https://www.moneylogist.com
