Inflation is something we hear about all the time, but what exactly is it? In simple words, inflation happens when the prices of goods and services go up over time. This means that the money you have today may not buy as much in the future. For people who invest their money, inflation can change the value of their investments. So, here with this article, let’s find out more about what inflation is and the effects of inflation on investments.
What is Inflation?
When the prices of everyday things like food, clothes, and services increase over time, it is called inflation. This rise in prices means that the value of money decreases. For example, if a packet of milk costs ₹50 today, but in a year it costs ₹55, then that is inflation. This means your ₹50 would not be enough to buy the same packet of milk anymore. Inflation usually happens due to more demand & less supply, rising costs, and an increase in wages.
Effects of Inflation on Investment
Inflation affects everything, from travel to transportation and clothing to food. Here are the major effects of inflation on investments:
1. Impact of Inflation on the Stock Market: When inflation is low or steady, businesses may increase the prices of their goods, and this can lead to higher profits. This is good for investors as it can push stock prices up. However, if inflation is high, people might start buying less, which means companies could see lower profits, and this can cause stock prices to fall.
Also Read : P2P Vs Stock Market
2. Effect of Inflation on Bond Yield: Bonds are another popular type of investment, but inflation often does not work well for bondholders. Bonds pay a fixed interest rate, but when inflation rises, the real value of that interest decreases. For example, if you hold a bond that pays 4% interest, but inflation is 5%, your real return is actually negative.
When inflation goes up, new bonds may offer higher interest rates to attract investors. This eventually causes older bonds with lower interest rates to lose value.
3. Effect of Inflation on Real Estate: Inflation can help real estate investments increase their value as property values and rental prices often rise along with inflation. This is the reason people often invest in real estate as it makes for a good choice for protecting the money during inflation.
Also Read : Why Real Estate Investment is not a good Choice
4. Effect of Inflation on Saving Accounts: For people who keep their money in savings accounts, inflation can be a problem. This is mainly because savings accounts offer low interest rates, often less than the rate of inflation. This means that while your money is safe, it is actually losing its value over time. That’s why it is important to think about investing your money in ways that can at least match the inflation rate. And P2P lending is one of these ways to earn inflation-beating returns over time.
How to Protect Investments from Inflation?
Now that you know how inflation affects your investments, here’s how you protect them from inflation:
Download the 13Karat app and start investing in our 6-month investment plan and 3-month investment plan offering returns of up to 13% per year. The 13Karat app is easy to use, provides secure transactions, and offers a smart way to beat inflation by earning higher returns than traditional savings options.
