Decoding the Investment Puzzle: Essential Digits to Nail for Successful Investments
In India, effective financial planning is crucial for achieving various financial goals. This article provides insights into the key factors to consider, focusing on inflation rates, rate of return, and investment options.
For long-term financial goals such as retirement, children’s education, or buying a home, it is generally appropriate to assume a long-term inflation rate around 4%. This assumption protects against inflation risk in planning, as it accounts for moderate inflation over the long run and avoids underestimating future expenses.
The official inflation rate in India, as of mid-2025, is unusually low at about 1.55% to 2.1% (July 2025 figures), which is the lowest in several years. However, these low rates are considered temporary due to factors like strong harvests and lower global oil prices and fluctuate month-to-month. Econometric models and forecasts project inflation to trend upward to about 3.8%–3.9% in 2026–2027, close to the Reserve Bank of India's target range of 2%–6%, with a midpoint near 4%.
For shorter-term goals (within 1–2 years), it may be reasonable to use the current low inflation rates (~1.5% to 2.7%), but planners should be cautious as inflation is expected to rise again.
The rate of return is another important factor in financial planning, as it determines how much needs to be invested each month to reach a goal. For instance, equities have delivered close to 13% returns over the long term, but a conservative rate of returns of 11-12% should be assumed for calculations.
Short-duration funds or dynamic bond funds can provide an average return of 7-8% in the current interest rate scenario, while the returns for short-duration funds are around 6.64-7.68%. The long-term averages of returns for gilt funds with a constant duration are around 8.10-8.99%. Debt funds work out to be a better option for long-term investment compared to FDs due to easier portfolio rebalancing.
It is essential to consider inflation-adjusted returns. For example, if you expect a 7% return on a fixed deposit but inflation is 4%, your effective growth is about 3%.
A friend created a financial plan with his wife, including investing for their child's schooling, college, and marriage. They initially assumed a lower inflation rate, but when expenses related to two children increased the amount they had to invest, they had to increase their life insurance and rework their goals, finances, and investment plan.
Remember, an incorrect assumption can require reworking the entire financial plan. Therefore, it is crucial to calculate the correct inflation rate to understand the future value of goals.
In summary, use a 4% inflation assumption for long-term financial goals in India to protect against inflation risk in planning, while for short-term goals, consider the current, temporarily lower, near 1.5%–2.7% rates but expect them to revert closer to 4% over time. This approach aligns with official data trends, RBI targets, and expert forecasts.
- For effective retirement planning in India, it is advised to assume a long-term inflation rate of around 4% to account for moderate inflation and prevent underestimating future expenses.
- Short-duration funds or dynamic bond funds can offer an average return of 7-8%, making them a more attractive investment option compared to fixed deposits for long-term investment due to easier portfolio rebalancing.
- In calculating the rate of return, a conservative rate of approximately 11-12% should be assumed for long-term financial planning, as equities have historically provided close to 13% returns over the long term.
- It is essential to consider inflation-adjusted returns in personal-finance planning, as an incorrect assumption can necessitate substantial reworking of the entire financial plan, impacting insurance coverage, investment options, and retirement planning.
