Inflation

Inflation is the rate at which the cost of living increases.

The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past.

For example, if there was a 10% inflation rate for the next year, a
Rs. 100 purchase today would cost Rs. 110 in a year.

This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment's 'real' rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value.

For example, if the annual inflation rate is 10%, then the investment will need to earn more than 10% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won't buy as much today as they did last year.