Beat the inflation

Will your Investments
beat the inflation?
www.aramanagementsolutions.com
Gateway To Your Financial Success

Current Generation
Previous Generation
Rising of hopes & aspirations:
As human beings, our dreams and aspirations are always very high,
more so in this age and era where we have immense exposure to
what is happening around the world. We have dreams of buying a
house/villa, providing the best education to our children, owning
a car and travelling the world. We want to achieve all these dreams
and are leaving no stone unturned.
These new avenues have also created new challenges: increased
income levels have pushed up the prices of goods & services.
Let’s look at a simple example to understand this phenomenon:
The cost of Education and health care is rising at a higher rate compared
to regular inflation.
The real issue - The challenge of living longer:
Unlike the previous generations, today we run the risk of “living
longer”. When we retire, we should have “enough corpus saved”
to sustain a retirement period of 25-30 years without further
addition to investments or income earned.
If the current expenses are Rs.40,000.00 per month;
• To maintain the same standard of living 20 years from now you
would need Rs. 186,500 per month at an assumed inflation rate
of 8%
• To manage the expenses of 1,86,500.00 inflation adjusted
expenses for the retired life of 25 years, an investor would need
an approximate corpus of Rs.4.00 Crores.
Inflation
Year
2005
2015
Inflation
5
20
15%
49
260
18%
100
500
17%
35-50 -
-150-200
12% 8%
Cost of Tea Medical Cost
(Per Visit)
Cost of
Movie Ticket
Average monthly
school fees
(semi Urban)
Average monthly
Expenses
Year Cost of Tea Medical Cost
(Per Visit)
Cost of
Movie Ticket
Average monthly
school fees
(semi Urban)
Average monthly
Expenses
Impact of Inflation - 20 years from now
2015
2035
Rs. 20.00
Rs. 327.33
Rs. 75000.00
Rs. 20,54,477.60
Rs. 500.00
Rs. 11,552.80
Rs. 200.00
Rs. 1,929.26
Rs. 40000.00
Rs. 1,86,500.00
18
0 20 40 60 80 100
Study - No. of years
Working Period - No. of years
Retirement Period - No. of years
42 10
25 30 25
Source of life expectancy: www.timesofindia.indiatimes.com

Financial Goals:
Considering how the story of inflation is unfolding, it is crucial for
an individual to be prepared financially. It is necessary for an
investor to set Financial Goals. In other words, a financial need
expressed in terms of time & money is called a Financial Goal.
To give you an example: Corpus to be saved for children’s higher
education by a couple is a “financial need”. But deciding to
accumulate Rs. 50 lakhs by the year 2024 for children’s higher
education is called as “financial goal”. The concept of Asset Allocation:
Conventional wisdom always says “don’t put all your eggs in one
basket”. Mixing of asset classes reduces the risk of the portfolio.
The key objective of the investment portfolio is to “reach financial
goals” by reducing the risk and optimizing the returns.
Asset allocation is the process of figuring out how much of one's
portfolio will be invested in each of various "asset classes"
depending on one's risk taking ability and financial goals.

Challenge for the Investors:
How many Asset Classes beat inflation?
Assumptions and Source for the above mentioned table: It is assumed that Interest earnings
from Fixed Deposits are taxed at 20%. The applicable tax rates for capital gains from Gold and
Real Estate investment suffers capital gains tax of 20% after considering indexation (Cost of
Inflation index/CII 1981-82 - 100 and 2014-15 - 1024). Source of Fixed Deposit and Gold
rates are from www.rbi.org.in and real estate data based on an article published in Live Mint. A
rough rate of real estate property in Gurgaon DLF City land in 1980 costed Rs. 2 Lakhs and
now the investment is turning to Rs.2 Crore approximately. Based on this data, we have arrived
at the returns of real estate investment. The data given here is of 35 years tenure (1979 to 2014).
The biggest dilemma for an investor is to choose the right asset
class which would help him/her in reaching the desired financial
goals. Equity and Real Estate are the asset classes that beat
inflation hands down. But there is an aversion in the minds of
Investors towards investing in equity or equity mutual funds in
India. Based on “Penetration of Mutual Funds in India” report
which was published in 21013-14 India’s Mutual Fund industry
“Assets to GDP ratio” stood at 6.99% in comparison to 40% of
World Average.
• During the Bull Run between 2003 and 2008, even the retail
investors took aggressive calls on equity investment because of the
multi-bagger returns.
• The sentiments were so upbeat that investors took personal loans
to invest in equity market.
• In the year 2006 and 2007, the story of Infrastructure and Mid &
Small Cap investment themes started unfolding; even first time
investors started making higher allocation towards these flavours
of the season.
• The investment basics were left far behind and equity market
players became invincible. The 2008 global market fall taught
market players a lesson “Greed is not Good”.
• High volatility and the slow down after 2008 that resulted in
investors losing money has further made equity an asset class
difficult to understand. Now with market recovery in 2014, people
have again started putting their bet on sectoral themes probably
repeating the same mistake they made in 2008.
The scenario was no different in Real Estate market. Retail
investors who entered the real estate market when the prices were
peaking were stuck in the market crash. The salaried people who
had taken up home loans for a bigger or a second house had done
so because of the availability of home loans at a cheaper rate. But
the higher exposure hit people badly when there were job cuts or
salary cuts due to economic down turn. Due to economic down
turn, the interest rates started going up which directly impacted the
housing loan EMI. Now in 2015, we are seeing strong signs of
economic recovery but there is still a long way to go.
During 2007 to 2011, Gold rates soared up and people rushed
towards the yellow metal. But with the subsequent fall in the gold
prices during 2013-2015, people who had invested in Gold during
2011-12 by looking at the past performance had yet again invested
into an asset class that was getting into negative trajectory.
The question is “Which is the right investment option?”
Asset class
Inflation
Fixed Deposit
Gold
Real Estate
Equity - Sensex
7.57% - - -
8.41%
10.82%
15%
16.72%
6.73%
9.74%
13.50%
16.72%
-0.78%
2.02%
5.51%
8.51%
Rs. 75,954.25
Rs. 2,01,050.67
Rs. 6,54,130.28
Rs. 17,41,381.23
Rate (Per Tax) Rate (Post Tax)
Inflation
Adjusted Rate
Rs.1LakhInvested,
theaccumulation
overyears
Performance of Asset Classes (Annualized Return)

Scheme Name Returns
over 7yrs
Returns
over 10yrs
Source:www.mutualfundindia.com
Starts Investment at Age
Retirement Age
Investment Period
Investment Frequency
Expected Returns
Corpus at Maturity
25
60
35
5000.00 per month
12%
30
60
30
5000.00 per month
12%
Rs. 3,24,76,345.33 Rs. 1,76,49,568.87
Manish Rahul
Equity Mutual Funds:
Albert Einstein once said that "Compound interest is the eighth
wonder of the world. He, who understands it, earns it. He, who
doesn't, pays it.”
Over a short term period, equity mutual funds as an asset class are
exposed to volatility.
Investing in equity mutual funds helps an investor to stay ahead of
inflation in the long run and helps him achieve his long term financial
goals. The risk of investing in a single share or few selected stocks, can
be reduced by investing in mutual funds. The Fund Manager who is
handling the fund, invests in a large pool of stocks which diversifies the
risk and lends an expert hand in handling investor’s money.
Equity, across the globe is considered to be one of the best asset classes
to have in one’s portfolio. Over the last 10 years (i.e, May 2005 – May
2015) the Nifty has given returns of 15% p.a compared to 7% p.a.
average inflation rate. Equity Mutual Funds tend to outperform the
market/benchmark consistently over a period of time.
7 years and 10 years performance of comparison of selected mutual
funds and the benchmark/Nifty
Most individuals forget one key factor to build wealth - start investing
early in one's career. The benefits of compounding work best over
longer periods of time and if you want to give more time to compound
your wealth, you need to start investing early. Let us look at an example
which explains the power of compounding.
Manish and Rahul are two colleagues. Both are 25 years old and have
similar income. Manish knows the benefits of starting the investment
early, so he has set the ball rolling at the age of 25 and has adopted a
systematic investment approach in order to meet his financial goals.
Rahul, on the other hand, has been postponing the decision of
investment and start the process of investments from the age of 35.
Because he started investing late, to make up for the delay he has
invested higher amount every month. Both Manish and Rahul have
invested in same fund and same investment amount.
Let us see what will be the accumulated corpus with them when they
retire at the age of 60:
If you notice, Manish’s corpus is almost 3 times that of Rahul’s corpus.
This notional loss in Rahul’s case can also be called as Cost of Delay.
Hence it’s proved that investors, who are regular with their investments
& contribute for a longer period, will see the maximum benefit from
this magic called the Power of Compounding.
Dos & Don’ts of Equity:
• Understand the risk before investing into equity
• Investment horizon should be for atleast 7‐10 years or more
• Look at selecting Large Cap, Diversified and Multi-Cap mutual funds with
performance history of more than 7-10 years
• For long term wealth creation choose the expertise proven fund managers to help
you in handling equity portfolio, instead of investing into stock directly
Franklin India Flexi Cap Fund 18% 16%
Franklin India Prima Plus Fund 18% 18%
HDFC Equity Fund 17% 17%
ICICI Prudential Dynamic Plan 16% 16%
L&T Equity Fund 17% 16%
Reliance Equity Opportunities Fund 22% 19%
Reliance Growth Fund 16% 16%
TATA Pure Equity Fund 15% 15%
Nifty 11% 12%

Debt
Debt investment is one of the most popular classes amongst the
Indian investors and it is also an important part of any portfolio.
Debt products are characterised by two things - safety of principal
and fixed and regular income.
This asset class includes investments like Fixed Deposits, Bonds,
NSCs, Corporate Deposits, PPF, EPF amongst others. All these
products are essentially money given on loan to an entity like the
Government, Govt backed organisations or others like a company
and hence the term debt.
The interest rates in the Debt market move exactly opposite to
Equity Market. When the interest rate starts rising the equity
markets goes down and vice versa when interest rate starts falling.
Adding Debt to the portfolio along with equity investments
reduces the risk of the overall portfolio.
The given chart shows the opposite movement of Sensex and
Interest rate over a period of time.
• Investing in Debt reduces overall portfolio risk
• When the financial goal is closer, it is recommended to move
the investment from risky assets to debt
• Debt Investments can be used as a systematic way of entering
and exiting the equity market
However, irrespective of your goals or your age, a certain portion
of your portfolio needs to be in debt as a plausible alternative to
volatile equity, forming the base of your portfolio - especially
during high inflation and high interest rates.

Real Estate:
Buying a property is the conventional and the most trusted avenue
for investment in India. Real estate investment and holdings have
shown us stories in India due to the development of not only the
metro cities but even the smaller towns. This asset class gives long
term capital appreciation and beats the inflation convincingly.
Real estate investment done by an individual gives him/her a sense
of accomplishment but it comes with riders. While investing into
real estate, an investor
• May not be able to invest into multiple properties to spread the
risk
• May not be able to liquidate the property at the right time to get
the cash flow for meeting the financial goal
• Has to put in more time and effort to find the right property
for investment
The recent trend in metros has been to invest in apartments. But
its probable that real estate investment doesn’t always give the
desired level of return. One of the biggest reasons for this is the
gap between supply and demand. There is no long term returns in
owning steel or bricks. Every time there is a real estate boom, it
triggers off fresh construction. This supply quenches the boom.
Ultimately, when the price of structures exceeds the price of
bricks and steel, new supply emerges, which is bad for real estate
prices. The rise of a professional real estate industry, coupled with
access to formal finance including foreign capital, has increased
the scale of supply and has given bigger and faster corrections.
Gold:
Gold is another investment option that is favoured by most
Indians and is perceived to be a safe investment option. Gold
serves as an investment option that insulates the investors from
inflation. Most investors think of gold as an insurance policy. They
buy little gold to insulate the portfolio against shocks – be it from
politics or economic downturn or a global catastrophe like the
2008 global credit crisis.
Between 2008 and 2010, Gold as an Investment gave average
return of 25%.
Gold unlike other assets classes, is different in two ways - there is
limited supply, which means that you cannot increase the supply of
gold the way you can in the case of equity shares or bonds. So the
price of gold does not fluctuate the same way as it does for equities
or bond prices. The second reason why gold is different is that it is
an international asset and is available to an Indian investor at the
same price as a US investor (ignoring local factors like import
controls and the like).
Investment in Physical Gold has certain limitations:
• Since there is an emotional value attached to gold ornaments,
the investor would not want to sell the asset in his/her lifetime
• Specific to investment in jewellery as an option, it might not
fetch the market price if the investor decides to sell
• Cost of storage and safety is a concern

Right Asset Allocation:
The idea of the investment is not to take very high risk and
generate high returns. Investment Portfolio should generate
consistent returns by assuming lesser portfolio risk.
Illustration shows: Two investment choices, invested on 1st
January 2000.
A mixed basket of investment portfolio reduces the volatility and
generates consistent returns
Choice 1- Pure Equity: Rs.100.00/- invested in Sensex, and its
movement over years.
Choice 2 – Asset Allocation: Rs.25.00/- each in Sensex, Gold, Gilt
Funds and FDs. How the investment of Rs.100.00 in diverse
basket would have performed over years.
Finally the crux of the matter is what is the right asset allocation
mix? The asset allocation is again decided based on the financial
goals.
There is no single standardized solution for allocating assets. The
asset allocation needs to be customized depending on the
individual investors’ goals and other factors. Asset allocation is not
a one-time event: it needs to be revisited once in 6 months or 12
months. A true financial advisor can sit with you to design a
customized portfolio and help you to reach your financial goals.
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Equity 100 77 63 65 113 127 181 266 390 187 335 394 295 369 400 511
Asset Allocation 100 103 106 118 150 162 186 231 276 281 356 406 406 454 447 500
0
100
200
300
400
500
600
EquityV/sAssetAllocation
Aggressive Moderate Conservative
Short Term Debt
Long Term Debt
Equity

Disclaimer:
Mutual Fund Investments are subject to market risks, please read Scheme Information Document before investing. Past performance may or
may not be sustained in future. Mutual Fund Units involve investment risks including the possible loss of principal. Investors are advised to
consult their tax advisors with respect to the tax consequences of the purchase, ownership and disposal of mutual fund units. The information
contained herein should not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media
or reproduced in any form. Past performance is not indicative of future performance. The future value of investments may rise and fall with
changes in the market. ARA Management Solutions Pvt Ltd is not responsible for any error or inaccuracy or for any losses suffered on account
of information contained in this report. This report does not purport to be an offer for purchase and sale of mutual fund units or any other
financial products. M/S ARA Management Solutions Pvt Ltd or its employees cannot be held liable for any loss or sufferings incurred because
of any of these investments. This information is as of 1st September 2014 but is subject to change. The information provided in this
document is of a general nature and has been prepared without taking account of Investors personal needs, financial circumstances or
objectives. The examples are hypothetical and are not meant to illustrate the circumstances of any particular individual. Before acting on this
information, Investor should consider the appropriateness of the information, having regard to Investor’s needs, financial circumstances and
objectives. Investor should read the relevant Product Disclosure Statement and consider if the product is right /suitable for him.

Knowledge Partner and content developer :
About ARA Management Solutions:
ARA is an independent investment advisory company based in Bangalore. We provide flexible, end to end solutions to Individuals and
Families to enable them to achieve their financial goals & objectives. We also assist Trusts, Associations and Companies in optimal
utilization of their cash flows by structuring an ideal balance between safety and liquidity
The foundation of ARA was laid with a single minded, client centric approach. Managing wealth has been our business practice as well
as personal passion. While seeking to actively engage with our clients in their wealth creation process, we intend to disengage them from
the associated complexities of the same.
As an independent company not owned by or affiliated with any Brokerage or Investment Group, our aim is to help our investors
optimize their portfolio returns. We firmly believe that we can grow only if our clients grow. Rest assured, we strive to protect our clients’
financial interests with utmost seriousness.
We facilitate goal setting, investment planning, tax planning, retirement planning and risk management. Our product & service basket
encompasses Mutual Funds, Fixed Income Products, Insurance, Equity Portfolio Management, Dealing with stocks and Mortgage
Assistance.

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