FLAME Newsletter - May 30, 2012


QUOTE OF THE WEEK:

“Inflation is bringing us true democracy. For the first time in history, luxuries and necessities are selling at the same price” – Robert Orben

This is definitely applicable in the current scenario where inflation is literally burning a hole through our pockets. While these levels may be unusually high, an investor must always plan his investments in such a way that his returns beat the rate of inflation. A safe rate could be taken at 7%.

YOUR FINANCE DEMYSTIFIED:

Back in your college days, you may remember going to a restaurant and having a lavish meal for just about Rs 300. Today, when your kids are in college, they tell you that Rs.1,000 can barely get one a proper meal in a good restaurant for two people. This is inflation or simply put price-rise. Not only does the ever increasing inflation make things costly over time, it can also have a serious impact on your savings.

But how does that happen? The simple answer is that inflation makes currency lose its value. To understand this better, let's take a simple example. You want to buy an LED TV this costs (just for explaining purpose) Rs 100 today. But you decide to save for it this year and buy it the next year. So till then, you put your money in the bank, and let it grow interest. Even at a good rate of 8%, you will get Rs 108 back at the end of the year. However, let's assume that the rise in inflation was 10% and the LED television is now worth Rs 110. Thus to buy it, you would have to shell out an extra Rs 2 from your pocket.

Compounded inflation over the years can zoom past the interest rate offered by your bank, and within a few years, the product maybe well out of the grasp of your Rs 100. This is a clear example of how currency loses its value over time and is a serious problem faced by our economy.

We live in times, where inflation grows everywhere by almost 9-10%. Going at this rate, what you save today for your tomorrow might not be enough by the time it is actually tomorrow. Assuming a growth based on the interest rate on your investment is called a nominal return, in reality, you would have to take in to account inflation which when factored gives the Real Return on an investment. Thus, while investing money for the future, opt for instruments which provide a real return (and not a nominal return) on your money which is a return higher than the inflation.

A PICTURE SPEAKS A THOUSAND WORDS...

What You Should Know About Inflation

With all the buzz surrounding inflation these days, one must understand it and its effects on the economy. Simply put, inflation is the rise in prices of the various products and services that we avail. Companies increase the prices of their products and services if the cost of their resources, or input costs, increase. Rising prices affect businesses and individuals alike and every business tries to pass on the price rise to customers to cope up with the situation.

A thought for investors

If you are a regular investor, you will understand the bearing inflation has on investments. New investors must be acquainted with the effects inflation can have on the market. You will need to change your investment strategies accordingly to make sure that you beat the rate of inflation. While investing, assume a rate of inflation accordingly to the level it is at present. When you are calculating your returns, you must make sure that the rate of your returns beats the rate of inflation.  For example, if the rate of inflation in a year is expected at 7% and your investment which matures then has a rate of interest at 8%, you are effectively beating inflation.

Financial statement of companies 

The financial statements of companies are an important gauge for understanding inflation. The financial statement of a company includes theirs gains, asset value, expenses and even the past expenses. This way, you can calculate the difference between the margins, expenditure and income between then and now. The current situation of a company, and its future, becomes clear with the financial statement.

The market situation

When inflation is on the rise, retail product prices increase. Once you have seen the company’s financial statement, you will get a clear idea about the effect that will have on the prices of the company’s products and services.

Change in interest rates

Typically, the Reserve Bank of India changes interest rates depending on inflation levels. When inflation is high, banks encourage people to save more money. At this time, bank deposit rates are high and loans are expensive. When inflation is low, banks do the opposite to boost demand and growth.  

Best time for investors

A rising inflation scenario is a favourable time for investors to park their funds. They can invest their money is gold as the metal is considered a hedge against inflation. Gold prices appreciate even when inflation rises. As mentioned earlier, investors can also park their funds in bank fixed deposits etc. as interest rates are typically high in a rising inflation scenario. However, when it comes to stocks, factors other than inflation also need to be considered before investing.

Read more…

Inflation and Price: Destined To Intertwine

TERM OF THE WEEK

Inflationary Gap

It is the amount by which government and private spending exceeds the amount required to provide a staunch price level and full employment.

IN THE NEWS THIS WEEK:

Speaking of inflation, there is a looming fear that it might just get stoked again as the government late last week raised the prices of petrol by an unprecedented level of over Rs.6.28 plus taxes per litre. However, the Centre has decided to avoid raising prices of the more politically sensitive diesel, LPG and kerosene for now.

Petrol prices hiked by Rs 7.50/litre

CALCULATORS

Use this calculator to check how price rise will impact your savings in the future. You can accordingly plan your investments to help you get your desired return. How, don’t forget to take the expected rate of inflation into account.

Impact of Tax & Inflation on savings

ABOUT FLAME

FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL initiative to promote financial literacy amongst the masses in order to make them an integral part of India's spectacular growth story.

In an era of accelerating GDP and rising per capita growth, financial literacy has become more critical than ever before such that we all reap the tangible benefits of the nation's economic prosperity. Financial inclusion has been quite high on the governmental agenda, given its emphasis on widening the Banking & Financial services network across the country. IIFL's FLAME initiative stands committed to complement this effort by helping common people gain financial growth and security though better awareness and education on the variety of financial products while avoiding the lure of and loss from unrealistic claims made by unscrupulous agents and ponzi schemes.

Our objective is to light a FLAME, as the name suggests, which will set ablaze a chain of FLAMEs across the country. The new-found light of knowledge will undoubtedly dispel the dark clouds of financial illiteracy and ensure the bright sunshine of financial growth and prosperity

This portal is but one of the various IIFL initiatives that would be part of FLAME.



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