Investing in stocks certainly provide a natural hedge against
inflation corroding the investment.
How come?
Historical data suggests that in the long term, meaning over 15
years, stocks give a return of over 15% compounded annual growth rate (CAGR).
The BSE SENSEX which commenced its glorious journey on 1st April 1979 with a
base value of 100 stands today, 8th September, 2016 at 29045. This translates
into a CAGR of 16.57% in 37 years.
On the other hand inflation in India over the same 37 years
stands at a CAGR of 8.17%. It is also to be noted that before the economic
liberalisation in 1991 the inflation rates frequently used to be in double
digits. However in the last 15 years governments have started taking inflation
control seriously. Presently it is sought to be kept below 5% per annum.
From the foregoing it is clear that even after adjusting for
inflation, stocks have given a real return of 8.40% CAGR, which is simply
amazing. A sum of Rs.1,00,000 invested in BSE Sensex on 1st April 1979 would
have become Rs.2,90,45,000 today!
In conclusion, there is no doubt whatsoever that stocks
invariably protect the investment from erosion on account of Inflation.
