Are your investments inflation proof? (2024)

By Chirag Mehta

Don’t find paying taxes fun? You are not alone. In fact, searching for ways to legally pay less tax is a favorite Indian pastime. We are so passionate about tax saving that our investments start and end with Section 80 C. Why do we want to avoid paying taxes or pay less tax? The answer is obvious: taxes leave us with less money to take home, and lesser money to buy things.

Then how come nobody seems to complain about the silent, ruthless tax twin that eats into our money’s ability to buy things year after year? I am talking about Inflation.

Yes, inflation is a tax – silent because it slowly creeps into our lives without us noticing and ruthless because it can turn our finances upside down if it catches us unprepared. It is a tax we pay every year, not in rupees and not to the government, but in an indirect way with our reduced purchasing power.

Purchasing power is the amount of goods and services that can be purchased with a unit of currency. Reducing purchasing power simply means the same money buys us fewer things over the years.

The governments and central banks can print and create currencies without any restrictions. This results in the currencies losing their value/ purchasing power as their supply increases.

This is why the first goal of investing is to grow our money at a rate faster than inflation. This is called inflation proofing. Inflation proofing is an investment strategy that insulates our money against inflation’s eroding effects in order to either grow, or keep our purchasing power intact. Because if you’re not doing that, you’re getting poorer, not richer - beating the very purpose of investing.

So it only makes sense for us to prepare/plan for inflation as, if not more, proactively and enthusiastically as we go about doing tax planning every year, right?

But in spite of so many resources and discussions about the inflation-beating abilities of equity as an asset class, it is far from holding a core position in an average Indian investment portfolio today. Instead we Indians love our fixed deposits. As per RBI, 51 per cent of household financial assets are held in currency and deposit form, compared to only 8 per cent in equities as of FY18. Of course, fixed deposits could be considered ideal for safety and stability of returns required in the short term for immediate expenses and emergency needs. But do they serve the purpose of long term wealth creation?

We decided to run some numbers. We analyzed the annual household expenditure numbers of a consumer basket in India from the year 2000 to 2018. The basket included food and beverages, transportation and communication, clothes, shoes, recreation, education and cultural activities, rent / accommodation cost, fuel / electricity, medical expenses, and other miscellaneous costs. We constructed this basket as we believe it’s more indicative of the inflation levels than the CPI index which tends to give a heavy weightage to food prices in its calculation, making it less relevant for the middle class and upper class which have higher education, recreation and lifestyle expenses.

So anyway, this annual household expenditure has increased at a rate of 9.5 per cent per annum from 2000 to 2018. Over the same time, the BSE Sensex has moved up by 11.4 per cent per annum. And surprise, surprise – fixed deposits have yielded a post-tax return of only 5 per cent per annum, and the price of gold has grown at 11.5 per cent per annum.

	2000	2010	2015	2018	CAGR
Annual household expenditure	68,923	151,279	280,064	354,224	9.5%
BSE Sensex	4,659	15,585	26,557	32,397	11.4%
Fixed Deposit (Value of initial investment Jan 1, 1990 =1000) (SBI 1 Year Deposit Rate)*	2,220	3,550	4,628	5,360	5.0%
Price of gold (INR / 10 gm)	4,400	18,500	26,344	31,438	11.5%

* Quarterly compounding and Tax rate on Fixed Deposit assumed to be 30%

These numbers thrash two misconceptions. First, that fixed deposits are “risk-free”. True, they give fixed and assured returns and have the backing of a bank, but they haven’t even helped investors outpace inflation, forget growing their wealth, which as discussed above is the biggest investment risk there is.

And second that gold is a dead investment because it doesn't accrue interest or generate earnings. With returns as good as Indian equity indices, gold has not only preserved purchasing power but done much more.

But how did gold manage to do this? Well, unlike currencies, gold cannot be inflated or printed; it is thus far less susceptible to government manipulation. For this reason, gold has historically remained a relatively stable purchasing power, whereas practically all currencies have lost purchasing power in the long run.

As always, gold shines.

Equipped with these statistics, we hope you pay attention to post-inflation returns as much as you do to post-tax returns, and prudently use gold for your investments. Because in this case, ignorance will not be bliss.

(Chirag Mehta is the fund manager-alternate investments at Quantum Mutual Fund)