Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

What is Inflation, and how does it impact your investments


Inflation is the decrease in the buying power of the rupee over time. The increase in the average price of goods and services means that you will effectively be able to buy less with your rupee next year than you did today.

Assume you buy a kilo of apples for ₹100. Next year, if prices rise along with inflation, the price for the same kilo of apples might be ₹120. If you save ₹100 from today, you may not be able to buy the same kilo of apples next year. With inflation, you do not lose your money. Its value decreases and eats into your purchasing power.

Warren Buffet once said, “inflation is a far more devastating tax than anything our legislation has enacted”. He added that it has a fantastic ability to consume capital simply. He never lost focus on fear of inflation.

As an investor, neither should you. You should understand the impact inflation will play on your portfolio. When a country’s inflation rises, the monetary policies of a country try to reduce the cash flow in the market. The objective is to reduce consumer spending, and bring back the economy on track.

Because of inflation, there is a need to invest and grow your capital so that you can at least match the purchasing power of your money. Assume you make a plan to invest the same amount of money in stocks, let us see how stock market returns can secure your purchasing power.

Additional Read: How to beat inflation with your portfolio

Suppose you have invested in a stock and got 15% returns in a year and inflation is 6% in that year. In that case, it means your net returns is approximately reduced by 6% and your actual inflation-adjusted return, also known as the real rate of return, can be calculated as:

Inflation adjusted return = (1+ Investment returns)/(1+Inflation)-1s = (1.15/1.06) – 1 = 8.49%

If you want your portfolio to be protected from inflation, your portfolio should earn more than inflation. Ideally, your portfolio not only needs to be adjusted for inflation but also needs to be adjusted for tax. If your tax and inflation-adjusted returns are positive, then only your purchasing power is increasing. Otherwise, you will be earning negative returns on your portfolio. Let’s understand this with a simple example. Suppose you have invested in a bank fixed deposit earning 6% p.a. returns. If you are falling into the 30% tax bracket, your post-tax returns can be calculated as:

Post tax returns = Investment returns* (1 – tax rate) = 6%* (1 - 0.3) = 4.2%

If inflation is 6%, your inflation and tax adjusted return will be (1 + 0.042)/(1+0.06) – 1 = - 1.7% 

It means your purchasing power is decreasing at the rate of 1.7% per annum despite getting a return on your investment. If you want to beat inflation and tax, you should consider investing in equity. Historically, the equity market has provided good returns in the long term that can easily beat inflation and taxes. However, the equity market will not offer you guaranteed returns, and some risk is involved. Still, investing a portion of your portfolio in equity is essential to meet your financial goals. You can invest in equity instruments like stocks, mutual funds etc., as per your financial goals and risk appetite.

Commodity stocks like precious metals and energy products might benefit from high inflation. The prices of commodities also rise along with inflation. Because they grow simultaneously, they may provide a good hedge against inflation.


As an investor, you need to understand the factors like inflation that impact the performance of your portfolio. Once you do so, you can invest in suitable asset classes to beat inflation. Whether you invest in equity or precious metals like gold, invest as per your goals, time horizon and risk profile. Some asset classes like equity could be ideal for long-term goals where you are looking for higher returns. On the other hand, some of your goals might be short term and the safety of the money is the priority, then you can choose to invest in safe debt instruments like liquid funds.

DisclaimerICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

Most Popular

  • 13 May 2022
  • ICICI Securities

The Five-Point Financial Planning Checklist For Your Family

Whether you just got married or planning to have a baby or have dependents, you should have financial plans for every stage in your life to ensure a secured future for your family members. Here are five things you can do financially for your family.   

  • 12 May 2022
  • ICICI Securities

What is a Zero Coupon Bond?

You get fixed returns in the form of interest until maturity when you invest in a bond. Zero-coupon bonds work a little differently. In this article, find out what zero-coupon bonds are, their advantages and whether you should invest in them. 

  • 12 May 2022
  • ICICI Securities

What are Cross Currency Pairs?

The forex market is the largest financial market globally. Currency trading is a lucrative and booming business. While most currencies trading happens in relation to the US Dollar, some don’t. That forms the basis of cross currency pairs. Here’s what you need to know about it. 

  • 12 May 2022
  • ICICI Securities

Investing principles from Benjamin Graham: The Father of Value Investing

Benjamin Graham was a British born economist, professor, and investor who taught at Columbia University. He was also a mentor to some of the most famous investors of the 20th century, including Irving Khan, John Templeton, & Warren Buffett. Buffett called him "the second most influential figure in his life, only after my father". 

  • 12 May 2022
  • ICICI Securities

How to Invest in Nifty 50?

The Nifty 50 is the benchmark index of the National Stock Exchange. It represents the 50 largest companies listed in India. Investing in the Nifty 50 can be a good idea for those looking to make index-linked returns. Here’s how you can invest in the index. 

  • 12 May 2022
  • ICICI Securities

Investment philosophy of Cathie Wood: The most powerful woman on Wall Street

Catherine Duddy Wood, also called Cathie Wood, is an investor who primarily invests in disruptive technologies and is the founder, chief executive officer, and chief investment officer of ARK Investment Management, LLC, an investment management firm mostly active in the United States.

  • 11 May 2022
  • ICICI Securities

How to Use Technology to Improve Your Finances

Technology has made life simpler for everyone. In the realm of personal finance, technology has streamlined many processes—from budgeting to automating your payments. On National Technology Day, let’s look at how technology has transformed our finances. 

  • 11 May 2022
  • ICICI Securities

How to Invest in your Every Goal with Mutual Funds?

Each of us is unique. We have different needs and goals in life. Some of us can ride along swinging markets, while some may need a relatively conservative investment tool. 

  • 11 May 2022
  • ICICI Securities

Four Reasons Why Entrepreneurs should Invest in Equity Mutual Funds

Equity mutual funds provide growth opportunities not just for individual investors but also for entrepreneurs and corporates. They make excellent investments for anyone looking for wealth creation. This article will give you four reasons why businesspeople should consider investing in equity mutual funds.