What is inflation and why to invest?

There is a big difference between saving and investing.

Saving is the process of putting cold, hard cash aside, usually in a savings bank account.

Think of Neha, who diligently puts ₹5,000 every month into her savings account. After 10 years, she has accumulated ₹6 lacs (₹5,000 × 12 × 10), plus a small amount of interest at 3-4%. Her money is safe and available for immediate use.

Investing is the process of putting your savings in various investment assets (such as stocks, bonds, real estate, gold, etc.) so that your money grows over time.

Now consider Arjun, who also sets aside ₹5,000 monthly, but instead invests it in a diversified portfolio of mutual funds. After 10 years, assuming an average annual return of 12%, his ₹6 lacs of contributions has grown to approximately ₹11.6 lacs. His money has nearly doubled through the power of compounding and growth.

While it's important to save money, it's even more important to invest your savings. If you don't invest your savings, their value will only reduce year after year on account of inflation.

What is Inflation?

Inflation is defined as a sustained increase in the prices of goods and services. It is measured as an annual percentage increase. As inflation rises, every rupee you own buys a smaller percentage of a good or service.

That's the technical definition. Let's take a practical example to understand exactly what inflation is and how it impacts your life.

A decade back, you could probably buy 1 kg of mangoes for about ₹20. Today, those same mangoes will cost you about ₹100 per kg. Now imagine you had ₹100 ten years ago. You could have bought 5 kgs of mangoes with it. If you have ₹ 100 today, you can only buy 1 kg of mangoes.

This is how inflation raises the prices of goods over a period due to which you can buy lesser and lesser quantities of goods.

Inflation is one of the major reasons why the value of your money has stayed almost the same or possibly even depreciated further. Therefore, you should try and invest your savings in assets with at least inflation+ returns so that your wealth continues to grow.

Investing money allows you to create wealth so that your standard of living just does not remain the same but also improves with time.