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Investment and Inflation - All you need to know.

Finance management should be done taking consideration of inflation.

By Sharad GuptaPublished 2 years ago 9 min read
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Investment and Inflation - All you need to know.
Photo by Erik Mclean on Unsplash

Investment is a word or action from which almost all persons stay away.

They will pursue insurance but they will never opt to invest. Such is a fear of investment in common people’s minds that for them investment means loss of money.

The term investment is a fad of rich people to divert or spend money somewhere.

But one cannot blame common people for such fear because there are several incidences of money duping under the tag of “invest and double money” from many fraud companies.

For their own greed of money, these companies have cheated lakhs of people through investment or chit fund schemes.

A common person who is badly in need of money has been duped for the double profit scheme.

One cannot understand the pain of a person who is risking all his savings to get some additional money.

He is not at all at fault if he dares to invest in fraud funds because his needs cannot be completed by anyone but himself.

What is an investment?

To invest the money in expectation of getting periodic or lump sum benefit after the term is completed.

For example, if a person is investing 1 lakh rupees for say 1 year, he expects that he will get it back with a good percentage of returns.

Investment is owning an asset or an item with the purpose of generating income from the investment which will increase the value of your asset after a particular period.

It includes the sacrifice of effort, money, or time from your end.

Investment can have different forms like money, property, business, etc. When a person aims to earn more money through the money he already possesses it can be termed as an investment plan.

An investment plan typically needs a lot of studies so as to gain the profit in less time to cover the amount of money invested.

In the finance sector, it is a quite simple calculation to gain appropriate returns of the money invested.

It depends on a person how much he can invest and how much he can get in return.

The returns may not be necessarily a gain, it can be a loss too so it is the responsibility of an investor to study the pros and cons and be prepared to get whether loss or gain.

The investments also can be divided into small and long term basis.

People who want more gain in a short period are at high risk of loss whereas the people who aim to get long-term benefits are exposed less to the risk of loss.

Investment and risk –

It is an unwritten rule that one might not get the expected benefits out of his capital investment.

It is called risk on investment. The investment amount matters most in terms of getting benefits out of the investment.

Even investment in tangible assets like property is a risk though the examples of the cost of properties going down are not seen.

The only thing is tangible property cost depends upon where it is situated.

If you are opting to invest in property in a remote area, you need to wait till the cost of property increases if you want to get considerable benefit out of that investment.

The benefit out of investment does not have any fixed formula, which means it is not like if you invest a huge amount then you will get huge profit.

It could be the opposite also. It is also possible that you might get a good profit out of even a small investment just because of the capitalization of the source you chose in the market.

Investment and profit do not have any rationale between them .as far as investment in the corporate sector is concerned the status is too volatile to predict whether a business idea will work or not.

There are many small start-ups which have made a big profit within 4-5 years and on the other hand, there are many big companies which are running in the loss despite a good brand in the market.

It all depends on the capital investment and the future of the product in the market.

In today’s weakened economy not many people dare to introduce new products or go for start-ups.

Post pandemic, the situation in the market is too unpredictable to foresee any outcome.

As of date, the only healthcare sector is surviving but that also has its limitations and there is huge competition in the market.

The one whose new idea clicks to the customers will survive.

Inflation –

Inflation means the general price rise of an economy over a period of time.

Inflation, typically, reduces the purchase levels in the market and affects the overall economy.

It affects the economy in both negative and positive ways. The negative way includes an increase in the opportunity cost of holding money and thus discourages the investment and savings.

The positive way includes reducing unemployment due to nominal wage rigidity encouraging the monetary policy, loans, and investments in different sectors.

The low rate of inflation reduces the impact of economic recessions as the labor market can quickly adjust to the changes.

The role of trying to keep the inflation rate low or stable is carried out by monetary authorities’ namely central banks.

Ideally, inflation refers to the general trend of prices and not any specific price. This means, if one material is purchased more than the other one, then that will become costlier than another material.

This is just a shift in price changes and not inflation. Inflation is directly linked to the value of currency which is linked with gold.

If there are more gold deposits then the price of gold and value of the currency will fall resulting in the rise in the prices of all other goods.

Relevant concepts –

• Deflation – a fall in the general price level

• Disinflation – a decrease in the rate of inflation

• Hyperinflation – an out of control inflationary spiral

• Stagflation – a combination of inflation, slow economic growth, and high unemployment

• Reflation – an attempt to raise the general levels of prices to counteract deflationary pressures

• Asset price inflation – a general rise in the prices of financial assets without a relevant increase in the prices of goods

• Afflation – an advanced increase in the price for food and industrial agricultural crops against the general prices.

Impacts of Inflation on Investments –

Inflation means an increase in price rate and every rise affects the cost of living and impacts the savings and investments negatively.

The saving or investment does not rise with the rise in prices therefore it dents your budget and puts extra pressure on your purse.

Types of Investments –

To overcome the reduction in overall return one needs to study well to invest money to get appropriate returns.

From the banking sector to stocks to bonds, each product has its own pros and cons.

One needs to understand the relevant risk factors while opting for any kind of investment. Following are some of the well-known ways to invest your money to get the maximum possible returns –

1. Bonds:

While investing in bonds or mutual bonds one must know that you are at risk of losing your invested money if bought a single bond or want to sell before the term-end.

A bond is usually, a loan that an investor makes to a government, federal agency, or corporation for interest payments and repayment of the principal amount for a particular term.

The prices can fluctuate and risk will vary depending upon the type of bond you possess.

2. Bank Products:

Most probably the safest of the investment types especially if you have an account in nationalized banks but with the lowest interest rate than any other investment.

Usually, common people will opt to keep their savings in banks because of its more safe than any other type of investment.

Though the interest rate is low most people feel their money is secure in the banks.

You can opt for a savings account, money market accounts, certificate of deposits, or federal insurance.

3. Stocks:

Often, stocks and stock mutual funds can be a part of diversified investment.

Investing in stock (also known as shares) means participation in ownership of some company.

The success or failure of the company will decide whether you are going to gain or lose money.

It also depends on what is the position of the stock market and the value of the share you own.

One needs to have good study or proper guidance about investing in the share market.

There are a lot of ups and downs and when and what to buy and sell is an expert’s capacity.

The factors involved in stocks are

• Volatility

• Types of stock

• Stock basics

• Buying and selling stocks

• Evaluation of stocks

• Stock splits

• Trading vs buy and hold

• Advanced short-term trading

4. Mutual Funds and ETFs:

Mutual funds and Exchange-traded funds are two ways you can invest money on.

Though funds offer professional management and diversification, like other investment options, funds pose risk.

The positive of funds investment is there is a wide variety of investment styles and strategies.

The investment is according to a specific strategy and the types are various with different features.

Publicly offered funds like mutual funds, exchange-traded funds, closed-end funds, and unit investment trusts are registered with the Securities and

Exchange Commission (SEC) as investment companies. Such funds too, have to variation in the interest rates as per the market value of the currency.

5. Insurance:

Life insurance is always considered as a part of an overall financial plan.

With low investment every term, insurance is supposed to be the best type of investment.

But this is not the same after the maturation period as we have seen how inflation affects negatively any investment plan.

This is also the reason that the insurance investment is called to be for our next generation as the life policy coverage benefit can rarely be enjoyed by the same generation.

Most of the life insurance policies end with the life of a person and therefore they leave nominal benefits behind them.

Insurance policies are much better in case of the sudden death of a person where the successor would get better benefit. There are different types of insurance policies –

• Whole life insurance

• Term life insurance

• Universal life insurance

• Variable life insurance

• Variable universal life insurance

6. Commodity Futures:

Commodity futures contracts mean an agreement to buy or sell a specific quantity of a commodity at a specific price on a decided date in the future.

Commodities can include grains, metals, oils, animal products, financial instruments, and currencies.

The Commodity Futures Trading Commission (CFTC) is a federal government agency that regulates commodity futures, commodity options, and trading markets.

Only registered members with National Futures Association (NFA) can trade commodity futures in the market.

7. Security Futures:

Federal regulations allow trading in futures contracts on single stocks and narrow-based security indices.

Security futures pose a high degree of risk and are usually complex for most people to understand.

If the loss is incurred it would be a very high amount of loss in a very short period.

As we have seen the investors need to be smart enough to multiply the money or they should be patient enough to wait for the right time to come for desired returns.

Any short-term high benefit investment poses a maximum risk and should be avoided as far as possible.

A long-term investment with steady returns will always be advisable to investors.

Though in the current scenario there is no guarantee which investment will work better for you, it is essential not to lose money in the crisis period.

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About the Creator

Sharad Gupta

I am a passionate writer.

My interest include fashion, relationship, health , life , make money, dating , digital marketing , education , career, parenting , Investment and many more .

My aim is Read , Write and Help.

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