Inflation Risk
Also known as purchasing power risk , it refers to the uncertainty that the future cash flows won’t be of the same worth as they are now, due to change in purchasing power. It will bring down the real return on investment.
Real return in view of Inflation
There is difference between actual return & real return on investment. Actual return refers to actual amount of return expected or realized, whereas real return is effective return expected or realized after considering inflation effect.
Real return can be better explained with an example
If return on investment is 10% & inflation rate is 2%, then actual rate of return would be 10%-2%= 8%.This would mean that if a person invests Rs 100, he will realize or expect Rs 10 as his return, but in effect he would be getting Rs 8 only, as inflation of 2% will bring down his cash flows from the investment.
How does inflation impact you?
- It will reduce the purchasing power.
- It also impacts the financial market resulting in volatility.
- It depreciates the income on securities.
- It will also affect the exchange rate of the currency.
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