How to Manage Your Money Better When Inflation Rises?

You will have noticed how the price of your favourite dishes in the restaurant you visited last year has gone up over time. That’s how inflation impacts you in real life. You are required to pay more for the same goods and services than you were paying a year ago. ‘Inflation is a tax without legislation’.

But also remember, Inflation not only makes things expensive but also lowers the real value of your savings and pensions. Can you do something about it? Yes, you can.

  1. Manage your budget well: You do not have control over economic conditions, but you do have control over your spending and saving habits. Make sure that you maintain a proper budget as monitoring your income, expenses, and savings will keep your money in the damage control mode.
  2. Invest to beat inflation: To combat inflation, you must avoid keeping your money idle in cash or in your savings bank account which offers negligible interest in real terms. Instead, invest your money in investment options where the returns are likely to be higher than the rate of inflation.
  3. Look for high-yield income instruments: If you need safe investments or regular income from your investments, you might have to at least partially ditch your favourite bank FDs. Other available fixed-income instruments like carefully selected corporate bonds, corporate FDs, perpetual bonds, State Development Loans etc would lessen the inflation impact much better.
  4. Loan repayment: When inflation is high, interest rates are generally increased to control the economy. If you have any floating-rate loans, it is better to pay off some portion of it to reduce the increasing interest that becomes payable on the loan now due to higher interest rate.
  5. Gold: For Indians, gold has always been a prominent investment option. It is also considered a hedge against inflation. Aside from the commonly held physical gold, investors can also consider gold ETFs and sovereign gold bonds but in a very small quantity, not more than 5-10% of total financial investments. Also, do not expect much from Gold investments by way of returns in the long run.

(Contributed by Yogesh Gola, Associate Financial Planner, Team Vikrant, Hum Fauji Initiatives)

Sweep Account – a Boon If Used Properly

We’ve all heard of Auto-Sweep Accounts being provided by a large number of banks. For those who don’t know about it, it is a facility that provides combined benefits of a Savings Bank account and Fixed Deposits. In this, your unused money above a laid down threshold limit gets automatically transferred to a fixed deposit and earns extra returns while still retaining the flexibility to be taken out in bits and pieces.

How does it actually work?

Bank Auto Sweeps is a very good feature given by the banks to people who want to maintain liquidity and earn fixed deposit returns,

When money goes to a sweep account, the bank takes it to be a 1-year FD in lots of Re 1 each. If it gets taken out before that (ie, before One year), 3 things happen:-

  1. Interest rate applied will be of the actual period it was kept there.
  2. Since it would be a premature withdrawal, penalty is applied.
  3. There is a TDS applied on the interest earned for the period that it was there. There is no tax benefit as the interest from a FD is taxable except for senior citizens where there is an exemption under IT section 80TTB.

So, many times, you may get a rate of interest lower than the savings bank rate if the movement in and out of the sweep account is very frequent and you will also see small bits of TDS deducted. Sweep account is a good facility but it is not to be taken as a substitute for an FD or any regular investment.

(Contributed by Nidhi Dogra, Associate Financial Planner, Team Arjun, Hum Fauji Initiatives)

Is the Depreciation of Rupee Good for Anybody?

It may seem paradoxical, but the depreciation of a domestic currency can be good for some parts of the economy.

First, let’s understand why depreciation happens. In any worldwide inflationary scenario, everybody runs to the nearest safe haven. And the US economy and the US Dollar (USD) is the go-to destination in such scenarios. So, investments start moving to US bonds and hedges start getting taken on USD, which is precisely what is happening now. Going by the principle of demand and supply, USD gets in more demand and its price goes up, meaning Indian Rupee gets depreciated versus the USD.

When Rupee depreciates, companies that import goods suffer since the goods imported in USD become expensive in Rupee terms. Companies relying on exports, on the other hand, benefit as they get pricier USD for the same Rupees spent on delivering the goods or services.

Depreciation of the rupee benefits export-oriented industries such as information technology, pharmaceuticals, textiles, and specialty chemicals. Import oriented industries like mineral fuels, oils and waxes and bituminous substances, pearls, precious and semi-precious stones and jewelry, electrical machinery and equipment, nuclear reactors, boilers, machinery and mechanical appliances etc become more expensive.

Investment wise, products and services that become more expensive may not be able to pass on the full increased cost to the consumers. They thus have to absorb part of the price increase which drives down their profits and hence, the stock price suffers. Reverse happens for export-oriented companies. So, sectoral funds as well as diversified equity mutual funds having higher exposure to these sectors may stand to benefit.

And an opposite phenomenon will happen when Indian economy is in a better position than other countries of the world.

Since very few of these things can be predicted and controlled, a good portfolio needs exposure to different sectors at all times instead of trying to pre-empt and betting headlong into a handful of sectors. That is where diversification and portfolio balancing comes in.

(Contributed by Priya Goel, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)

Children Need Your Time..!!

You can count on us for your holistic financial planning and overall well-being in these changed family scenarios…!!

Somehow, more focus on career, personal finances, and lack of tolerance among family members has shifted us to a nuclear family approach. In nuclear families, parents work hard alone to secure the future of their children. In such scenarios, financial advisors also advise parents to invest early in their children’s education, marriage, and so on, since there is no other support expected from any other quarter.

Children usually learnt the value of relationships and ethics/values from this joint family culture. All family members used to cooperate, share happiness or sorrows, and sometimes even fight with each other.

There was a time when joint families were a common culture in India. No family member ever felt alone. Approaching Chacha-Chachi, Tau-Tai, Dada-Dadi, cousins, brothers, and sisters helped in the overall development of the children.

(Contributed by Jatin Uppal, Deputy Manager, Humfauji Initiatives)

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