Summary of this article
Headline SIP returns hide the impact of inflation on real wealth.
Personal inflation often exceeds CPI, especially for education and healthcare.
What matters is purchasing power, not the corpus figure.
An investor invests in mutual funds via a systematic investment plan (SIP) of Rs 25,000 a month. Assuming a rate of return of 12 per cent, ten years later, her mutual fund statement shows Rs 56 lakh. It feels reassuring. The numbers look solid. But is that Rs 56 lakh really worth it?
Inflation doesn’t announce itself loudly. It works quietly, year after year, shaving off the buying power of your money. The same Rs 100 that once covered groceries for a week now barely lasts a couple of days. School fees, hospital bills, rent and everything keep getting costlier. And this is where many SIP investors get misled by headline returns.
In India, consumer inflation, measured through the Consumer Price Index (CPI), has averaged roughly 6 to 7 per cent over the long term. That number sounds manageable until you realise inflation is not uniform. Education costs have been rising closer to 10 - 12 per cent annually. Healthcare inflation is even higher, often in the 14 - 15 per cent range. People’s personal inflation is usually much higher than the official average.
Coming back to that SIP example. Over 10 years, you invest Rs 30 lakh in total. At a 12 per cent annual return, your corpus grows to about Rs 56 lakh. On paper, that looks like a big win. But adjust it for a conservative 6 per cent inflation, and the real value of that Rs 56 lakh drops to roughly Rs 31 lakh in today's value. So, you did make money but far less than what is mentioned on the paper.
“So, if an investor fails to factor in inflation while planning their investments, a goal that seems achievable today may fall short years later,” says Pramod Sharma, partner, Citrine Financial Services LLP, a Delhi-based Amfi-registered mutual fund distributor.
The distortion becomes even sharper over longer periods. Stretch the mutual fund SIP to 30 years, and the number on paper can look massive, that is, over Rs 7 crore. But after accounting for inflation, its real purchasing power is closer to Rs 1.3 or Rs 1.4 crore in today’s money. The gap between nominal returns and real returns keeps widening with time.
No doubt, inflation, as per Sharma, slowly eats away at your savings, just like termites quietly weaken wood from the inside. And, this is where most financial plans go wrong.
Goals are framed in today’s costs, but investments are tracked in future numbers without inflation adjustment. A college education that costs Rs 50 lakh today could easily need Rs 1.2 crore after 15 years, even at a modest 6 per cent inflation rate. If your SIP planning ignores this, you may end up falling short despite years of disciplined investing and decent returns.
An investor should not forget to factor in the impact of inflation while planning for their long-term goals.
Whether it’s retirement savings, a child’s education, or buying a home, explains Sharma, planning with inflation-adjusted returns keeps your dreams realistic and on track. In simple terms, he says, “it’s not just about how much you earn or how big your investment corpus is, but how much your money can buy in the future at the then prices. That’s why it becomes important that investors plan their long-term goals, keeping inflation in mind, not today’s cost.”
So, review your goals regularly. Keep increasing your SIP amounts as your income rises. And most importantly, judge your returns not by how big the corpus looks, but by what it will be able to actually buy in future.
Because in the end, wealth isn’t a number on paper. It is your purchasing power.
