When planning your investments or SIP, it’s important to understand that the value of money changes over time. Due to inflation, what seems valuable today may be worth much less in the future. Here’s how inflation can impact your mutual fund investment of Rs 1 crore over 20 years.
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Understanding Inflation
Inflation reduces the purchasing power of money. For example, in 2010, a gas cylinder cost around Rs 350, but by 2025, it costs about Rs 1,050—a price rise of 7.6% per year. Similarly, Rs 100 could buy 2 litres of petrol in 2009, but today, it buys only 1 litre. This shows how inflation nearly halves the power of your money over time.
How Inflation is Measured
The government measures inflation using the Consumer Price Index (CPI), which tracks the prices of essential items like food, housing, health, and transport. India’s CPI-based inflation rate was 3.61% in February 2025, but the average has been over 5% in recent years.
The Reserve Bank of India (RBI) aims to keep inflation at around 4%, but real prices often feel much higher.
Returns on Investments: Real vs. Nominal
Fixed-income investments like Fixed Deposits, PPF, EPFO, and Post Office schemes give annual returns of 6%-8.25%. After considering inflation, real returns are only 2%-3%.
On the other hand, mutual funds have historically given better returns of 12%-15% per year. But, after adjusting for inflation, the real returns are about 6%-9%.
Example: How Inflation Affects Your SIP Investment
Let’s say a 40-year-old wants to save Rs 1 crore for retirement at age 60. With a monthly SIP of Rs 18,000 and a 15% annual return, here’s how inflation changes things:
✅ Without Considering Inflation:
- Monthly SIP: Rs 18,000
- Investment period: 20 years
- Total investment: Rs 43.2 lakh
- Future value: Rs 2.73 crore
✅ With 5% Inflation Rate:
- Monthly SIP: Rs 18,000
- Investment period: 20 years
- Total investment: Rs 43.2 lakh
- Inflation-adjusted value: Rs 1.02 crore (which is equal to Rs 59.64 lakh in today’s value)
So, what seems like Rs 2.73 crore after 20 years is actually worth only Rs 1 crore in today’s terms.
Why It Matters
This example shows why it’s essential to factor in inflation while setting financial goals. Ignoring inflation can make your savings fall short of your real needs.
Conclusion
To build a strong financial future, always consider the impact of inflation when planning your investments. Use SIP calculators that account for inflation and review your goals regularly.
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