With an unrelenting inflation, that refuses to go down, a moot question arises is holding cash a wise option. Banks are offering interests in the region of sub 8% (even for 3 years holding) and with real cost of money (inflation) above 10% and some estimates suggest (over 15%). Hence if means if your money is lying in a bank (at 3%) you are losing money to the tune of 12% a year!!! Now that is a really scary scenario. Hence the days of keeping the money in a FD or a bank account might not be a wise option after all.
So what is the solution, with most of the investments not giving even the inflation adjusted returns.
Well for one the answer might be in leveraging. Heres why. Let us take the example of investing in real estate.
Suppose you have Rs 10 Lakhs with you and you take a housing loan of 50 Lakhs on it. The total cost of the house is Rs 60 Lakhs and is expected to go up by 15% for the year. The total outflow for the year would be 50,000*12 = 6 Lakhs (assuming you have taken a loan for 50 Lakhs for 20 years for the house).
Rental income from the house = 15,000*12 = 1.8 Lakhs.
Value appreciation of the house = 60L*15%= 9 lakhs.
Opportunity cost of the 10 Lakh invested = 10*.06= .6 Lakhs.
Hence the total maths comes as follows:
Total Outflow= 6+.6= 6.6 Lakhs
Total inflow= 9+1.8 = 10.8 Lakhs
Net Flow = Inflow = 4.2 Lakhs.
which basically means that by investing 10 Lakhs you have made a 42% return by leveraging.
this suggests a good way to beat inflation and stay ahead of the money curve. Hence it is imperative that the money does not stay idle for a long time, else the real value of money will decrease over time in an inflationary economy.
So what is the solution, with most of the investments not giving even the inflation adjusted returns.
Well for one the answer might be in leveraging. Heres why. Let us take the example of investing in real estate.
Suppose you have Rs 10 Lakhs with you and you take a housing loan of 50 Lakhs on it. The total cost of the house is Rs 60 Lakhs and is expected to go up by 15% for the year. The total outflow for the year would be 50,000*12 = 6 Lakhs (assuming you have taken a loan for 50 Lakhs for 20 years for the house).
Rental income from the house = 15,000*12 = 1.8 Lakhs.
Value appreciation of the house = 60L*15%= 9 lakhs.
Opportunity cost of the 10 Lakh invested = 10*.06= .6 Lakhs.
Hence the total maths comes as follows:
Total Outflow= 6+.6= 6.6 Lakhs
Total inflow= 9+1.8 = 10.8 Lakhs
Net Flow = Inflow = 4.2 Lakhs.
which basically means that by investing 10 Lakhs you have made a 42% return by leveraging.
this suggests a good way to beat inflation and stay ahead of the money curve. Hence it is imperative that the money does not stay idle for a long time, else the real value of money will decrease over time in an inflationary economy.
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