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By:

Kaustubh Kale

10 September 2024 at 6:07:15 pm

Silent Money Killer: Loss of Buying Power

In personal finance, we often worry about losing money in the stock market, dislike the volatility associated with equities or mutual funds, or feel anxious about missing out on a hot investment tip. Yet the biggest threat to our wealth is far quieter and far more dangerous: loss of buying power. It is the invisible erosion of your money caused by inflation - a force that operates every single day, without pause, without headlines, and often without being noticed until it is too late....

Silent Money Killer: Loss of Buying Power

In personal finance, we often worry about losing money in the stock market, dislike the volatility associated with equities or mutual funds, or feel anxious about missing out on a hot investment tip. Yet the biggest threat to our wealth is far quieter and far more dangerous: loss of buying power. It is the invisible erosion of your money caused by inflation - a force that operates every single day, without pause, without headlines, and often without being noticed until it is too late.
Inflation does not take away your capital visibly. It does not reduce the number in your bank account. Instead, it reduces what that number can buy. A Rs 100 note today buys far less than what it did ten years ago. This gradual and relentless decline is what truly destroys long-term financial security. The real damage happens when people invest in financial products that earn less than 10 per cent returns, especially over long periods. India’s long-term inflation averages around 6 to 7 per cent. When you add lifestyle inflation - the rising cost of healthcare, education, housing, travel, and personal aspirations - your effective inflation rate is often much higher. So, if you are earning 5 to 8 per cent on your money, you are not growing your wealth. You are moving backward. This is why low-yield products, despite feeling safe, often end up becoming wealth destroyers. Your money appears protected, but its strength - its ability to buy goods, services, experiences, and opportunities - is weakening year after year. Fixed-income products like bank fixed deposits and recurring deposits are essential, but only for short-term goals within the next three years. Beyond that period, the returns simply do not keep pace with inflation. A few products are a financial mess - they are locked in for the long term with poor liquidity and still give less than 8 per cent returns, which creates major problems in your financial goals journey. To genuinely grow wealth, your investments must consistently outperform inflation and achieve more than 10 per cent returns. For long-term financial goals - whether 5, 10, or 20 years away - only a few asset classes have historically achieved this: Direct stocks Equities represent ownership in businesses. As companies grow their revenues and profits, shareholders participate in that growth. Over long horizons, equities remain one of the most reliable inflation-beating asset classes. Equity and hybrid mutual funds These funds offer equity-debt-gold diversification, professional management, and disciplined investment structures that are essential for long-term compounding. Gold Gold has been a time-tested hedge against inflation and periods of economic uncertainty. Ultimately, financial planning is not about protecting your principal. It is about protecting and enhancing your purchasing power. That is what funds your child’s education, your child’s marriage, your retirement lifestyle, and your long-term dreams. Inflation does not announce its arrival. It works silently. The only defense is intelligent asset allocation and a long-term investment mindset. Your money is supposed to work for you. Make sure it continues to do so - not just in numbers, but in real value. (The author is a Chartered Accountant and CFA (USA). Financial Advisor.Views personal. He could be reached on 9833133605.)

Dussehra Special: Avoid Listening to 10 Heads

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“Duss (10) saron ki sunoge, toh sahi kaise chunoge?” This phrase resonates with the story of Dussehra, where Lord Ram triumphs over Ravana, a demon with 10 heads - each representing a different distraction or temptation. In the world of personal finance, these “10 heads” symbolise the overwhelming number of opinions and advice people receive when managing their money. If you listen to every voice and follow every trend, you will struggle to identify the right path for yourself.


Learn personal finance: Knowledge is power

In today’s fast-paced world, financial advice is everywhere - friends, family, colleagues, social media influencers, and unsolicited internet tips. Not all of it will be relevant to your unique financial situation. To navigate through the noise, it is important to take control of your financial education.


Start by understanding key financial concepts like risk, return, liquidity, and time horizon for different investment products. Risk refers to the potential loss you might face with an investment. Return is the profit you can expect to earn. Liquidity indicates how easily an asset can be converted into cash. Time horizon is how long you plan to invest before needing to access the funds.


Learning these basics will help you evaluate which products - be it mutual funds, direct stocks, gold, real estate, fixed deposits, or insurance - actually suit your goals and needs.


By educating yourself, you will develop a critical eye that helps you distinguish between helpful advice and distracting noise. Whenever you analyse any instrument, all four criteria (risk, return, liquidity, time horizon) must be considered together and aligned with your financial goals - such as children’s education, marriage, buying a home, vacations, cars, or retirement. Having a foundational understanding of these concepts ensures that you do not fall prey to quick-fix schemes or misleading suggestions that often sound attractive in the short run but prove damaging over the long term.


Have a financial advisor: Like a family doctor for your finances

Even with self-education, managing your finances can be challenging. This is where having a reliable financial advisor, much like a trusted family doctor, plays a crucial role.


Just as your family doctor understands your medical history and offers personalized care, a financial advisor tailors their guidance based on your unique profile - your income, savings, risk tolerance, and future financial goals. A good advisor helps you stay focused on long-term objectives while steering you away from emotional or impulsive decisions.


Dussehra reminder

So, this Dussehra, remember: do not listen to ten heads. Choose wisely, stay informed, and have a trusted financial guide by your side. After all, it takes years of education, experience, expertise, and wisdom to write a prescription - so do not self-medicate when it comes to your wealth.


(The author is a Chartered Accountant and CFA (USA). Financial Advisor. Views personal. He could be reached on 9833133605.)

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