During inflationary times, investors have to be extra careful. On the one hand, expenditure shoots up because the basket of goods being consumed becomes more expensive.
On the other hand, the value of investments gets eroded because the real rate of returns (returns after inflation) falls dramatically. Let's take an example to understand this.
Total sum invested: Rs 10, 000
Return on investment (a year): 8 per cent
End of year returns: Rs10, 800
Inflation: 7 per cent
Real rate of return: 1 per cent (Rs 10,100)
Tax: 33 per cent = Rs 264 (if you are in the highest income bracket)
Actual return: Rs 10,100
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