Inflation decrypted

Have you ever wondered about what is inflation? How it affects your investments?I will try to put whatever I have learned and read.

Here is the standard definition: In economics,inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the price level rises, each unit of currency buys fewer goods and services.

Indian inflation rate is based on wholesale price index (WPI) . A set of 435 commodities are used to calculate WPI. WPI is available at the end of every week (generally Saturday), for a period of 1 year ended that day.

In my words, Inflation is some number which increases when price of certain commodities is increased compared to it’s prices in last year. Whenever inflation increases buying power of rupee decreases. Here is a simple hypothetical example, suppose you’re an employee in some firm. You get X amount as a salary for a particular month, inflation rate was 3% in that month. Next month you get the same amount as a salary but inflation rate rose to 5%, you’ll be little bit short in your monthly budget. Don’t blame your wife, it’s inflation. You may wonder that your requirements didn’t change over a month but still you didn’t fall within your budget. It’s because inflation rose which reduced your buying power with same amount of salary you got. In real world you cannot find this difference within a month, yearly comparison will give you a better idea.

How it affects your investments:

Many of us never thought of this hidden figure when we get return on our fixed income investments. I know many people who considers themselves as safe investors by investing their money in fixed deposits, I am agreeing with them on “safe” part but not with “investor” part if they haven’t predicted or considered inflation rate. If a person is buying a fixed deposit today at 8%. Is he really getting 8% return on maturity? No!!, Assuming inflation was positive for the year, purchasing power has fallen and, therefore, so has real return. One has to take into account the chunk inflation has taken out of return. If inflation was 4%, then his return is really 4%.

Right now rate of inflation in India is -0.21% (22nd August’09).

Currently fixed deposit rates in India are 6.75%-7%, I would not recommend to invest in FDs at this point of time because inflation is negative right now, eventually it’ll go up by next year so effective rate of return will be 3.5-4% depending on the inflation rate at that time. Instead of investing in FD, i would recommend to invest in gold or silver if you want to play safe. Gold is almost 16000 when inflation is negative. I see lot of upside in these commodities when inflation will start rising.

I don’t think Indian markets will come down today but there will be some profit booking.

Happy Investing !! Off to make a delicious pav bhaji today )

Trading Basics

I don’t know why they don’t teach how to invest money as a subject in college. One of the biggest question I had with my first salary was what to do with the money left after paying rent and buying gifts for my family.

Being from a traditional Gujarati family, I was familiar with stocks and I have seen 90% of people investing in stocks for making money in short time. Very few people consider it as an long term investment.

I know some people who trades in stock market just for sensation – a gambling sensation. One should have control on his mind about entry and exit points. There should be some reasoning behind your buying / short position, I have seen people blindly following recommendation from investment web sites. It’s like going to a fortune teller and asking about your future in return of some fees. If he is capable of forseeing the future, he himself would have been a millionaire by now.

Before buying any stocks, you should ask very basic questions to yourself like what is the nature of business it do? How’s it order book? What price range it is trading in last year.

Successful trading requires the ability to take meaningful risk, but also the capacity for controlling that risk. One can trade for sensation and one can trade for profits, but rarely can one do both.

Gold crossed $1000 mark today, I am very bullish about this commodity. I am seeing more upside today in Asian as well as Indian markets!!

Looking forward to Nadal’s game today in USOpen!!!

Happy Trading !!!!

Labor day weekend 2009

Here I am, writing my first blog entry on labor day weekend.
My wife gave me an idea about starting my own blog to share some thoughts and ideas. I’ll try to put together something on personal finance and stocks which I learned on my own and still learning.

This weekend was very lazy, didn’t do anything special, watched Pink Panther 2. I was surprised to see Aishwarya Bachchan in the movie. Looks like she still has to learn lot of things to become pro Hollywood actress.

Yesterday Indian stock market gained almost 2%, I am expecting some profit booking today.