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What Should Common Man Do In Times Of Inflation?

May 14th, 2011 by
  • At 9.4 per cent, inflation is perhaps the biggest concern for common man today. From your daily grocery bills, petrol bills, parties, etc., everything is digging deep into our pocket, which is enough to send the monthly budget for a toss. Higher expenses on our household items result a decline in our ability to invest. In such times, it is important to look into the ways to budget household expenses and opt for a right investment strategy to benefit most out of a situation. For the same, let’s follow these simple steps…  


    List Out Your Expenses

    The first step toward any virtuous monthly budget is to list out your monthly expenses and estimate the cost of each of them. These expenses should include all your monthly bills, household budget, insurance payments, EMIs and shopping allowances. The exercise is imperative to make an estimate of your monthly cost.


    Re-Prioritize Expenses

    High inflation situation calls for re-prioritization of expenses. Of course, unavoidable expenses such as house rent, loan repayment, children’s school/ college fees, etc. have to be duly accounted for. Bur here, you can put a cap on other necessary expenses such as mobile bills, petrol cost, clothing, etc. to prevent excessive spending. For instance, if your office is in vicinity to your home, think of using public transport for half a month. Ideally, if unavoidable expenses accounts for, let’s say, 30 per cent of your expenses, other expenses should not exceed by 50 per cent of your net monthly inflow. Judiciously cutting down on important but limitable expenses will help you save 15-20 per cent of money for unforeseen circumstances like medical emergencies, etc.

    Luxury or lifestyle expenses such as weekly parties, travel and movies at expensive multiplexes should be avoided. In addition, you can also identify the hidden luxury expenses, if any, and curtail them. It may include subscribing magazines/ newspapers more than what you actually read, etc.

    While preparing your monthly budget…

    • Remember: The purpose is not to tie you down but to help you define economic freedom
    • Cut down your luxury expenses to minimal
    • Re-assess your monthly budget every month
    • Keep provision for emergencies


    Monitor Your Spendings

    Monitor your spending pattern for a month and see if there is scope to re-define your monthly expenses. However, remember that you don’t get too carried away with curtailment and disturb your comfort zone.


    Use Your Credit Card Wisely

    Credit card is your mate in bad times, if used wisely. Use your card within its spending limit and in accordance to your billing cycle to take advantage of free credit period. For instance, if your bill gets generated on 7th of every month, you will get 20 days to make payment. Hence, it is advisable to use your card to buy necessary stuff on 8th onwards, so that the purchase made will be credited in next billing cycle. Purchase made on 8th will give you maximum free credit period to enjoy, i.e., 50 days in this case.

    If the bill happens to be significant, let’s say, Rs 8,000-Rs 10,000, you can also invest this amount in ultra-short term instruments like one-month Fixed Maturity Plan (FMP) to earn interest over that. In other words, this way you can earn money on the sum that you have already spent. Here, you have to remember to make payment, as and when they are due, to avoid interest charges.   


    Is It The Right Time To Invest?

    Inflation is high and expenses are spiraling, but does this mean that we should cut down on investments? Not really… The secret of successful investing lies in identifying avenues that works in conjunction with prevailing environment. Here, investment options to beat the inflation may include:   


    Term Deposits 

    Of late, inflation & interest rates have established a positive correlation in India with RBI consistently raising interest rates to combat rising inflation. In fact, since March 2010, RBI has hiked key policy rates by nine times, which has sent FDs rates to their all-time high. With this, you can lock your funds at high prevailing rates for at least three years.  Also, there is pressure on banks to raise deposit rates further as they are short of RBI deposit growth target of 18 per cent for FY 2011. 

    However, FDs with less than 3 years should be avoided as returns are likely to be negative. Let’s assume, you invest in a one-year SBI FD, the pre-tax return is 7.75 per cent. If you’re in 30 per cent tax bracket, the post-tax return would be just 5.7 per cent. With the annual average inflation rate for FY’11 pegged at 9.4 per cent, you earn negative returns of 4 per cent. However, if you take 1,000 days FD scheme of SBI (little over 3 years), at 9.25 per cent, the average inflation for the next 3 years is expected to be lower than post tax return of your FD. Furthermore, FD rates for long-term are still not very high, so they may not be able to beat inflation. Hence, it is required to do your maths before proceeding.    

    People with little more risk appetite can invest in fixed maturity plans (FMPs) or corporate deposits, which earn more than 10 per cent.


    Equity Exposure Through Mutual Funds

    Historically, equity has been the best asset class to beat inflation. Over the last decade, India’s benchmark index, Sensex, has shown around 15 per cent CAGR growth, whereas the inflation has averaged at about 6 per cent CAGR.  However, it is advisable not to invest directly into the stock market, if you do not have proper knowledge. Instead, take mutual fund route by investing in well-diversified mutual funds as a guard against fluctuations. You can also take SIP route to invest as one might not have a lump sum to invest due to inflation.


    Preferred Investment Avenues In High Inflation Times 

    Investment Type


    Preferred for

    Equity based mutual funds

    Moderate to High

    Medium – Long Term



    Medium Term

    Gold, Silver




    Moderate to High

    Long Term

    *Riskiness for individual investments has been defined in present environment.  
    Also, it has to be seen in conjunction with preferred tenure

    In addition, there are other options such as index funds that track underlying indices and sector funds. Index funds are a cheapest way to invest in market, and still get a flavor of blue-chip funds. Sector funds are limited in nature because of their focus on a particular industry and require investment expertise. Both are risky in nature but returns are superior as compared to inflation.  

    However, it is advisable to avoid equity exposure for short-term. At present, global markets, including India’s, are feeling pinch due to the risk of sovereign debt crisis, rising fear of inflation, uncertainties associated with global growth outlook, thrust for portfolio diversification. These drivers are making stock market exposure vulnerable in short-term, even with mutual funds’ route.


    Gold & Other Commodities

    Somebody’s loss is else’s gain. Historically, when global environment is uncertain, investors prefer to rest their money in gold for its safe-haven property. In times of high inflation, gold prevents erosion in the value of purchasing power, making it a natural hedge against inflation, amongst other commodities.

    Gold prices in global market have moved up by 29.5 per cent during 2010, making a new high for consecutive 10th year and outpacing inflation by a long way. The returns (for past 5 years) from Sensex and gold Benchmark Exchange Traded Scheme (BeES) have been compared. While Sensex returns have been quite volatile, gold BeES returns have been comparatively consistent and well above inflation level.  Investors can bank upon this history and invest in gold for short-term period.


    Gold Returns vs Sensex, Along With Inflation

    Year Ending

    Sensex Value

    Sensex Returns (%)

    Gold BeES

    Gold BeES Returns

    Inflation (%)





































    Source: BSE India, Gold BeES, Media Reports

    The global uncertain outlook offers room in gold prices in near future. Generally, gold and US dollar have an inverse relationship, and due to weak economic outlook US dollar is expected to weaken further, which means higher gold prices. In addition, higher oil prices will move gold price further up. India specific robust domestic demand is expected to keep up the momentum deriving gold prices in domestic market. As per World Gold Council, during 2010, India's annual gold consumption had reached to a record high of 963.1 tonnes and has been rising at 13 per cent CAGR over the past decade.   



    Like gold, property is also a preferred avenue of investment, in high inflation times, as property prices tend to rise upwards in line with the increasing cost of construction. The only deterrent here is that the cost to buying a property can be substantial outgo and beyond the reach of most investors. But if you can manage this, property is a safe bet against inflation.

    Besides the capital appreciation, the rentals on residential property, especially in metro cities, increase with inflation.



    To close it out, there are avenues, if invested wisely, to insulate you against inflation. The onus lies with the investor to make the most of these opportunities, depending on his risk appetite and investment objectives.


    Published on May 14, 2011 · Filed under: Credit Card Articles;
    1 Comment

One Response to “What Should Common Man Do In Times Of Inflation?”

  1. ramani said on

    while the article is good, i find really nothing new…

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