Inflation and its impact on your savings: Check strategies to manage inflation and maximise returns

Inflation is a measure of how much the prices of goods and services in an economy have risen over a period of time. In India, the Reserve Bank of India (RBI) primarily uses the Consumer Price Index (CPI) to measure inflation, which tracks the prices of a basket of goods and services commonly consumed by households. When the CPI increases, it means that the overall cost of living has gone up and the purchasing power of money has decreased.

Inflation can affect your savings in a number of ways. One of the most direct effects is that it can erode the purchasing power of your money over time. For example, if inflation is running at a rate of 5 per cent per year, then a product that cost Rs.100 today will cost Rs.105 in a year's time. This means that your money will not be able to buy as much in the future as it can today, even if you save it.

Another way that inflation can affect your savings is by reducing the real return on your investments. Many savings and fixed-income investments in India, such as fixed deposits (FD), post office schemes and provident funds, pay a fixed rate of return, which may not keep pace with inflation. For example, if you invest your money in an FD that pays a fixed rate of 5 per cent, but inflation is running at 6 per cent, then your real return on the investment is actually -1 per cent. This means that you are losing purchasing power on your savings.

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To combat the effects of inflation on your savings, you may consider investing in assets that have the potential to appreciate in value over time. Mutual funds and equities, for example, have historically had higher returns than fixed deposits and are one of the most effective ways to keep up with inflation. Alternatively, investing in real estate and rental property is also a good way to preserve the value of your savings over the long-term.

However, it is important to note that these types of investments also come with certain risks and volatility, and it is important to consult with financial professionals to understand the risks and make informed decisions that suit your individual needs and circumstances.