Inflation is crucial to investing as it reduces the value of your investment returns over time. Therefore, the most challenging aspect of your investment process is to keep up with the rate of inflation to protect the value of your investments as well as returns earned on it.

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Unfortunately, a majority of investors in our country, either doesn't recognise the threat of inflation to the wealth creation process or are unsure about how to tackle this threat. In an economy like ours, where inflation is persistently high, investors need to realise the importance of earning positive real rate of return, that is, nominal returns minus inflation and taxes.

While the nominal return represents the growth rate of your money, the real rate of return represents the change in the purchasing power of your money. Simply put, it's actually the real rate of return that indicates whether your money is growing in value or not. Since most investors keep their focus on the safety of capital and invest a major share of their investible surplus in traditional options offering guaranteed returns like FDs, debentures and small savings schemes, this important aspect of earning positive real of returns gets over-looked.

Considering that most of the traditional investment options offer lower returns and are taxed at one's nominal tax rate, the real rate of return usually turns out to be either negative or minimal. If you are a long-term investor, the first step towards achieving the positive real rate of returns should be to have an investment plan in place. Though it can be quite a challenge to develop a strategy that not only withstands the turmoil in different market conditions but also helps in tackling inflation, you can achieve the desired results by focusing on the correct asset allocation. Another important step that needs to be taken is to curb your expenses by budgeting them. By doing so, more money will be available for investments every month.

While investing for the long term, the focus should on an asset class like equity that has the potential to beat inflation. Equities also score over other asset classes as returns are tax efficient. Of course, when you invest in equities, you have to contend with volatility that exists in the marketplace from time to time.

Remember, if your portfolio has a substantial exposure to equity, the impact of higher inflation on your portfolio would be in the form of falling valuation, as rising interest rates spell trouble for corporate earnings as well as the stock market. While in the long run corporate earnings are generally able to outpace inflation, in the short-term investors get discouraged to continue investing in equities.

Therefore, you must honor your long-term time commitment and follow a disciplined approach to investing. If you do that, equities can be an ideal choice to stay ahead of inflation and accumulate a corpus that is usually required for achieving long-term goals like children's education, their marriage and your retirement planning.

Remember, tax efficiency has an important role to play in combating inflation for both long-term as well as short-term investments. For example, if you are in higher tax-bracket and invest in debt funds for a period of three years or more, benefit of indexation improves your post-tax returns significantly, as compared to fixed deposits wherein interest is fully taxed at your nominal tax rate. That's why, as an investor, you must follow a tax aware investment strategy for both long-term and short-term investments. While mutual funds are more tax-efficient than others, it is still important to investment with a clearly defined time horizon and chose the right option such as dividend or growth.

As is evident, staying ahead of inflation should be your top priority if you wish to have enough to realise your dreams.

The writer is CEO, Wiseinvest Advisors