Are We Really Understood Inflation? and What Returns are we getting from our Investments...Read on

To understand something, we need to dig slightly deeper, this is one such initiative, hope this helps to understand and where we stand all the days...

When I started my career in way back March 1996, 17 years before my salary was Rs. 3000 and I used to spend more than Rs. 2000 for the rent as well as food and transport. No mobile, No internet and No TV in the room. 

Expenses in Mar 1996	Rs.        -2,000
Expenses after (Yrs)  (1996-2013)	17 Years
Rate of Inflation	8%
Expenses in March 2013	Rs.         7,400

Assume at 8% inflation, the same amount today will be in the 17 years is Rs. 7,400. Today, we can't eat less than 50 rupees for breakfast, lunch and dinner, so it would be Rs. 4500 for food alone.

Assume rent is Rs. 2500 and mobile; transport and other stuff will easily be over Rs. 7400. So we can comfortably assume 8% inflation in the future too!

Unfortunately, many of the investor will never ever understand two things in finance 1. Inflation 2. Purchasing Power.

1. Inflation: Whatever is your investment vehicle, if it is not beat inflation, then sooner the inflation will eat all the money and you will go bankruptcy?

2. Purchasing Power: Investor will always look at the absolute value and never understand whether the money has the purchase power. Most of the investor will be happy, even if they get the money back after 5 years. At the rate of 8% inflation the value will be 50% only, which means the money has 50% of the purchasing power which investor hardly realize or notice.

I have enclosed excel file to understand the power of inflation much better, by putting inflation versus return to understand better. If something is demonstrated with numbers, generally people understand and relate easily.

1. Money Invested in Insurance Policy for Long Term or Retirement

2. Money Invested in PPF

3. Money Invested in FD

4. Money Invested in Mutual Fund SIP

Inflation Template:

This is the template wherein you can put the current expenses and the number of years and if you want to change the inflation percentage also, you will get future expenses. 

Whole Life Policy, Very Popular one

For 12 Lakhs life cover, the premium will be Rs. 1,04,400 per annum for 15 Years, for 25 years old Male.        

                                                             

From 6th Year onwards, 3% (approx.) of life cover will be given till 10th year, from 11th year till death or 100 years whichever is earlier.      5% of Sum Assured plus cash incentive (assume 3%), so it would be 96K per annum and I took it as 1 lakh. 

                                                                      

Assume, the investor is living up to 80 years; he will continuously get only 1 lakh as long as he alive. In this case, he will get 1 lakhs for 35 years.

After death Rs 12 Lakhs plus guarantee addition, and it will not be more than double, so it would be 25 Lakhs. If he dies within 15 years, then the investor will get Rs. 12 Lakhs. 

Assume monthly expenses of 20K today in 15 years will be 63K, which means 7.5 lakhs per annum, whereas insurance company is giving 1 lakh and no inflation adjusted payment in the future. This policy will be a disaster, yet it is sold like hot cake, because investor never ever understand what is inflation and what is purchasing power?       

If the same can be put in a mutual fund the maturity value at the end of 40 to 80 increased by 5 years as follows, which is much bigger than whole life policy and the beauty is we can take whatever the amount we want, whereas in whole life policy we have to receive very less amount only.

Age	Maturity Value
40	Rs. 44,05,706
45	Rs. 70,54,603
50	Rs. 1,17,21,101
55	Rs. 1,99,45,066
60	Rs. 3,44,38,503
65	Rs. 5,99,80,890
70	Rs.  10,49,95,305
75	Rs. 18,43,26,083
80	Rs. 32,41,34,020

Family PF (Husband and Wife Contribution)

Many of us believe that PPF is one of the best (safe) investment and returns are tax free and almost all the individual open PPF account. I have assumed 8.8% interest throughout, which is not possible for the next 15 years, yet I assume. At the rate of 8% inflation, the PPF money will get drained in 8 years after PPF closure. See the excel sheet attached.

I remember the saying GOOD is not GOOD Enough, When BETTER is Expected.

Popular Investments are FD, Senior Citizen Savings, Post office MIS

Most of the retiree wanted to safe guard their retirement funds to any of the above investments and all the interests are subject to tax, yet I assume 9% post tax return.

For example, if the individual invest 50 Lakhs rupees at the rate of 9% interest, and inflation assumed as 8%, in 11 years entire corpus will get drained, which means he will have no money left if he lives beyond 71 years!

Right Amount Invested in SIP

If you want to retire at 40, you need to save 24K per month for the next 15 years and you can live up to 78 years comfortably. You start doing whatever you like after 40 years.

We are living in the world of nuclear family and it will be worsen in the coming years. Moreover, the Generation Next wanted to retire quickly which translates into more retirement period than working period. If we have not created enough corpus's for our retirement, then future will be a big question mark?