INFLATION ! A hidden TAX on your returns.

Inflation is a crucial term for investors. For those willing to step into the fascinating world of investment not knowing inflation and its effects on the returns one generates can cost a lot. Inflation is not just important for investors but for every individual who engages into a financial activity. Without any further delay, Let's cut to the chase.

Inflation in a layman terms simply mean the the rise in price of general commodities.

It also represents the decrease in the value of a currency and the decrease in the purchasing power of particular currency. Let's understand it with a simple real life example.

Ex: In year 2000 the price of 1 liter Petrol was Rs.26. In 2009 it went up to Rs.47 per liter which is now over Rs.75. This shows the hike in petrol prices we witnessed. Similarly prices of various commodities over the period of 19 years would have grown on different rates.

Thus inflation itself is a general rate by which the price of commodities are expected to rise yearly. Inflation rate of every nation varies. India's inflation rate currently is below 4%. Which means the commodities worth Rs.100/- today will be worth Rs.104/- after a year. This shows the decreasing value of INR. It has been observed that developed countries who have stable economies are found to have a lower inflation rate compared to the developing one.

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INFLATION And Investment.

It is important to consider Inflation rate while making investment decisions since the value of invested money will decrease by the rate of inflation on yearly basis. Most Saving's Bank accounts give return at the inflation rate (4%-4.5% in India)

Why is Inflation considered Hidden TAX on returns?

The returns one generates on any investment cannot be considered as Real Return since the inflation needs to be adjusted. An example will make it easy to understand.

Ex: Mr. Rahul Gandhi invested Rs.10,000/- in an investment which generated him 8% return annually. The inflation rate for that year was 4%. Was it a smart investment? Calculate the Real Rate of Return on investment

Since the inflation rate is 4% the real return Mr. Rahul Gandhi made on his investment was only 4%. Thus, inflation decreases the returns one generates on investments, it is considered to be Hidden TAX on investments.