The situation in most Indian households and corporate offices today shows one major action taken - cost-cutting. This action is attributed to the inflation rates in India as well as the looming global recession. Inflation is defined as a sustained increase in the general level of prices for goods and services.

By November 2009, the key Indian Inflation Rate, the Wholesale Price Index, had risen to 4.5% per cent from 0.18% in April. Though the figures are not too high, the price of food items have shot through the roof!

Gold is an all time favourite
 investment to beat inflation

Even bank fixed deposits are a good bet. These instruments also offer attractive rates of return. For instance, while post office schemes offer 8 to 9% guaranteed returns, the same can go up to 10-11% in the case of bank fixed deposits, which can’t be considered bad in the current scenario.

Prices of vegetables and
pulses has skyrocketed

 
However, inflation eats into the returns offered by assured return schemes like fixed deposits and small savings schemes, thereby leaving investors with dismal real returns. How does inflation affect your savings and investments? Take a look at this example-If you deposit Rs. 100000 @ 12% p.a., with the annual inflation rate being 5% in the economy, then the real return on your deposit is 12%(nominal rate) minus 5%(inflation rate), i.e.7% p.a.(real rate) This is because after one year when your deposit matures you will have to pay 5% more for any purchases owing to that being the rate of interest in the economy for a year. Also in today's economy, it's easy to overlook inflation when preparing for your financial future. An inflation rate of 4% might not seem to be worth a second thought - until you consider the impact it can have on the purchasing power of your money over the long term. For example, in just 20 years, 4% inflation annually would drive the value of a rupee down to Re 0.44, i.e-less than 50 paise or in other words half the present value.

You'll need to create a portfolio of investments that will provide sufficient returns after factoring in the rate of inflation. So basically one has to look at a benchmark of return on investments which is higher than inflation so as to get a positive return on investments

4. Diversify your investments:
Risk and return always go hand in hand while investing. When you choose to save in government-backed savings plans, you can’t expect a higher-than-market rate of return for the money, because your primary objective is security of the funds and not returns.

So, even if some of your money is safe, you are still not meeting many of your financial goals. To accomplish your financial goals within the desired time, your investments should have some exposure to equity, real estate and other high-return instruments.

5. Invest in gold:
Commodities like gold are a hedge against inflation. This is mainly because the factors that affect the prices of gold are different from those that impact the prices of other assets like equities for instance.

When uncertainty affects global markets, investors prefer to take refuge in gold because in times of inflation, gold prevents erosion in the value of the purchasing power.

6. Invest as per your risk appetite:
Investing long-term or short-term should all depend on your risk appetite. However, shorter the term, lesser the risk you should take with your funds. This will ensure that the uncertainty of returns is lesser as you gradually approach your financial goal!

7. Safeguard your investments:
Invest in short term deposits and funds, commodities and property. This will help you to slowly reach your financial goals while safeguarding your hard-earned money.

Source: www.bankbazaar.com