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In today’s fast-paced financial world, we often hear advice on investing wisely, but not all of us fully comprehend how different investment modes stack up against each other. A common question is, “Where should I invest my money for the best returns?” But equally important is asking, “How will inflation affect my returns in the future?” The answer to this requires understanding how various asset classes—cash, bank accounts, fixed deposits, mutual funds, and shares—grow over time and the real returns they generate when adjusted for inflation. In this blog, we explore how different investments grow over time and how their inflation-adjusted value looks, using an example of investments in 2024 and their projected value in 2034.

1. The Effect of Inflation on Your Money: A Silent Killer

Inflation, the rise in the general price level of goods and services over time, directly impacts the purchasing power of your money. While you may feel secure seeing your wealth grow over the years, inflation eats away at that growth. For instance, if inflation is 7% annually, your ₹1,00,000 today will only have the purchasing power of ₹50,835 in 10 years. Therefore, it is critical to consider inflation when planning long-term investments.

2. Investment Modes: Understanding the Basics

To understand how inflation and investment returns interact, we can analyze five common investment options:

• Cash (0% return)
• Bank Account (3-4% return)
• Fixed Deposit (7-8% return)
• Mutual Fund (14-16% return)
• Shares/Stocks (23-25% return)

Each of these investments grows at a different rate, and the future value in 2034 will vary depending on the type of asset. However, the inflation-adjusted value is crucial in determining how much your wealth is truly worth in real terms.

3. Cash (0% Growth): The Worst Offender

Let’s start with cash. If you leave your ₹1,00,000 in cash under the mattress, its future value in nominal terms will remain ₹1,00,000. However, inflation dramatically reduces its real purchasing power. After 10 years, with 7% inflation, its inflation-adjusted value will drop to just ₹50,835. This means that the same ₹1,00,000 will buy you only half of what it can buy today. Holding onto cash for long periods is a sure way to lose purchasing power over time.

4. Bank Account (3-4% Growth): A Safe but Low-Return Option

Many of us keep our savings in a bank account, which typically offers an interest rate of 3-4%. Using the same initial amount of ₹1,00,000, the future value at 3.5% interest will be ₹1,34,392 in 10 years. While this looks like a decent increase, inflation reduces this significantly. The inflation-adjusted value in 2034 will be ₹68,318, barely an improvement over today’s purchasing power. Though safer than keeping cash, savings accounts barely help combat inflation, making them suitable for short-term goals but inadequate for long-term wealth building.

5. Fixed Deposit (7-8% Growth): A Moderate Return with Safety

Fixed deposits (FDs) offer a return of 7-8%, which is higher than savings accounts but still might not keep up with inflation. A ₹1,00,000 investment in 2024 will grow to ₹1,96,715 at 7.5% interest after 10 years. Inflation reduces the real value to ₹1,00,000, meaning the purchasing power of your FD remains the same over time. This makes fixed deposits a relatively safer option for those seeking capital protection, but you’ll break even only when considering inflation.

6. Mutual Funds (14-16% Growth): Balancing Risk and Reward

Mutual funds provide an opportunity to participate in the market’s growth, offering higher returns of 14-16% over time. For our analysis, let’s take an average return of 15%. In this scenario, your ₹1,00,000 grows to ₹4,04,556 over 10 years, giving you substantial nominal gains. After adjusting for inflation, the value is ₹2,05,656, which is significantly higher than other conservative options. Investing in mutual funds, especially equity-oriented funds, helps grow wealth over time despite inflation, making them ideal for long-term goals such as retirement or children’s education.

7. Shares/Stocks (23-25% Growth): High Risk, High Reward

For those who have a higher risk tolerance, investing in individual stocks can provide exceptional returns, ranging between 23-25%. Based on this range, a ₹1,00,000 investment grows to ₹9,31,323 over 10 years at a 24% rate of return. Even after adjusting for inflation, the inflation-adjusted value stands at ₹4,73,737, which is far above the returns from any other investment type. While stock markets can be volatile in the short term, history shows that long-term equity investments tend to deliver superior returns, making them a good choice for investors with a long investment horizon and the ability to stomach short-term fluctuations.

8. Choosing the Right Investment Based on Your Goals

The key takeaway from this comparison is the importance of investing in assets that at least beat inflation. While fixed deposits and bank accounts provide safety, they may not offer enough return to grow your wealth meaningfully when adjusted for inflation. On the other hand, mutual funds and stocks provide the potential to grow your money significantly, even after accounting for inflation, making them ideal for long-term wealth creation.

Before choosing an investment path, it’s crucial to align your choices with your financial goals and risk tolerance. If your priority is preserving capital with minimal risk, then FDs and savings accounts might work for you. However, if you want to build substantial wealth over the long term and beat inflation, mutual funds or stocks should be part of your portfolio.

9. The Role of Diversification in Beating Inflation

One of the best ways to mitigate risk while still aiming for higher returns is diversification. Instead of putting all your money in one investment type, spreading it across different asset classes such as fixed deposits, mutual funds, and stocks can help balance risk and reward. By diversifying, you ensure that even if one asset underperforms, others in your portfolio may compensate and keep your overall wealth growing.

10. Consulting a Financial Advisor for Tailored Advice

It’s important to note that each person’s financial situation, goals, and risk appetite are different. What works for one may not work for another. Therefore, consulting with a financial advisor like Munafawaala can help you make informed decisions tailored to your specific needs. Whether you need guidance on mutual fund investments, tax-saving strategies, or insurance, Munafawaala can provide personalized advice to help you achieve your financial goals and ensure that inflation doesn’t erode your wealth over time.

Conclusion: Don’t Let Inflation Rob You of Your Future

The journey to building wealth is not just about how much money you make but also how much purchasing power you retain in the future. As seen in the comparison across various asset classes, inflation can dramatically reduce the value of your money if you do not invest wisely. Therefore, to achieve long-term financial goals, it’s essential to invest in assets that can outpace inflation, such as mutual funds and stocks. At Munafawaala, we are dedicated to helping you make informed investment choices to grow and protect your wealth for the future.

In the fast-paced world of finance, mutual funds have become one of the most effective and popular investment tools. They cater to a broad spectrum of investors with diverse goals, from long-term growth to tax savings. As mutual fund distributors, we at Munafawaala understand that each investor has unique needs, risk tolerance, and time horizons. That’s why we’ve curated five distinct mutual funds that align perfectly with different financial goals and investor preferences.

Let’s take a deep dive into these funds and see how they can help you on your journey to financial success.

1. Canara Small Cap Fund: Ideal for Long-Term Growth

The Canara Small Cap Fund is highly recommended for investors who have a time horizon of 10 years or more and are looking to capitalize on the growth of smaller, emerging companies. Small-cap funds invest in businesses that have a smaller market capitalization but a higher potential for rapid growth. As these companies grow, so does the value of your investment.

Why Should You Consider Small Cap Funds?

• Higher growth potential: Since small companies have more room for expansion, the returns can be significantly higher compared to large-cap or mid-cap funds.
• Diversification: Adding a small-cap fund to your portfolio can provide diversification by tapping into segments of the market that larger funds often overlook.

However, small-cap funds tend to be volatile and may require a long-term commitment to smooth out the fluctuations. Hence, Canara Small Cap Fund is perfect for those who can wait out the market’s ups and downs for potentially superior returns.

2. NJ Balance Advantage Fund: Stability Through Algorithmic Operations

If you’re looking for a fund that provides stability with moderate risk, the NJ Balance Advantage Fund is designed with you in mind. This fund is suitable for investors seeking stable returns while minimizing risk through an algorithm-based method of operation.

What Makes This Fund Unique?

• Algorithm-driven investment: This strategy takes the human emotion out of decision- making and employs sophisticated algorithms to balance between equity and debt, ensuring a well-diversified portfolio.
• Moderate risk with reasonable returns: This fund is ideal for investors who wish to protect their capital while still earning a reasonable return.

This balanced approach makes the NJ Balance Advantage Fund a great option for those who want a hands-off, steady approach to investing without taking on too much risk.

3. SBI Long Term Equity Fund: A Tax-Saving Powerhouse

For investors who prioritize tax savings, the SBI Long Term Equity Fund is an excellent choice. As an ELSS (Equity-Linked Savings Scheme), it allows investors to claim tax deductions under Section 80C of the Income Tax Act, with a lock-in period of three years.

Why Choose This Fund?

Tax efficiency: Investors can save up to ₹1.5 lakh in taxes per year through this fund.

Long-term equity growth: Despite being a tax-saving instrument, the fund invests in equities, offering potential for higher returns over the long term.

This fund is perfect for individuals looking to reduce their tax burden while investing in a robust equity fund that can grow over time.

4. HDFC Large Cap Fund: Security with Long-Term Potential

If you’re a conservative investor who wants to take on minimal risk but still benefit from market growth, the HDFC Large Cap Fund is ideal. Large-cap funds invest in well-established, blue- chip companies with a proven track record.

Why Should You Opt for Large Cap Funds?

• Lower risk: Since large-cap companies are generally more stable, the risk associated with investing in them is lower.

• Long-term wealth creation: While the returns may not be as high as those of small or mid-cap funds, large-cap funds provide steady growth over time.

This fund is a safe bet for investors who prefer a stable and predictable return while participating in the growth of large, financially sound companies.

5. Tata Digital India Fund: Betting on the Future of Technology

For investors who have a higher risk tolerance and want to capitalize on the booming technology sector, the Tata Digital India Fund is a fantastic option. This high-risk, high-reward fund focuses on companies within the IT sector, making it an ideal pick for those looking to take advantage of the digital revolution.

What Makes IT Sector Funds Attractive?

• Growth potential in tech: As the world continues to embrace digital transformation, IT companies are expected to grow exponentially.

• Diversification within tech: The fund covers a wide array of IT companies, from software development firms to hardware and telecommunications companies.

However, this fund also comes with higher volatility, making it suitable for investors who are willing to accept short-term market fluctuations for the potential of high long-term returns.

How to Choose the Right Mutual Fund for You?

• Now that we’ve outlined these five exceptional mutual funds, you might be wondering how to pick the one that’s right for you. Here are a few steps to guide your decision:

• Assess Your Financial Goals Are you investing for retirement? Saving for your children’s education? Or perhaps you want to maximize your tax savings? Your goals should dictate which fund is the best fit for your portfolio.
• Consider Your Risk Appetite Different funds come with varying levels of risk. If you can handle more volatility and are aiming for higher returns, small-cap or sector-specific funds like the Tata Digital India Fund might be suitable. For more risk-averse investors, large-cap or balanced funds like the HDFC Large Cap Fund or NJ Balance Advantage Fund would be better choices.

• Evaluate Time Horizon Long-term investors who can afford to leave their money untouched for a decade or more might benefit from the growth potential of small-cap funds. However, if you need to withdraw your investment sooner, look into funds with shorter lock-in periods, such as ELSS or balanced funds.

• Tax Considerations If minimizing your tax burden is a priority, the SBI Long Term Equity Fund offers tax- saving benefits under Section 80C, allowing you to grow your wealth while also saving on taxes.

Final Thoughts: The Power of Tailored Investments

The journey to building wealth is deeply personal, and choosing the right mutual fund plays a pivotal role in this journey. The five mutual funds mentioned above are designed to cater to different financial needs, from growth and stability to tax savings and sector-specific investment opportunities.

At Munafawaala, we’re committed to helping you navigate your investment options with ease. We are an AMFI-registered mutual fund distributor (ARN: 289197), and our team is always ready to provide personalized advice tailored to your financial goals. Whether you’re a first-time investor or a seasoned pro, we can help you craft a strategy that aligns with your aspirations.

To explore how you can incorporate these funds into your portfolio or for personalized financial guidance, feel free to reach out to us. Together, we can make smart investments that add profit to your life.