Ground Relation & Bird's Eye View of Inflation and Equity

Ground Relation & Bird's Eye View of Inflation and Equity  

I had written the article below a week before I read the following news item.
The price of wheat flour or Atta. Do you know how much it has risen in 1 year. The most basic of food which is used to make almost everything around us has risen all most 40% in just one year.
Now onto the story...
Inflation is always viewed upon as a villain or as a corrosive acid which eats into your hard earned income and salary and finally renders it as useless or insufficient almost like a wooden almirah or furniture rendered useless by termites.
Whenever we go out into the market after coming back from ship and look at the prices of essential commodities and manufactured products we almost get a shock. For that matter very rarely have I seen that people come back from ship and ask the wife what is the household expenditure OR the wife giving a straight answer.
But whether we ask our spouses and whether they tell us or not the fact remains that prices never ever come down.
In order to counteract this menace of The Invisible Giant called inflation there are only 2 ways.
First, is that we have a consistently increasing salary. This is really not possible as we have seen the salaries stagnating for over a decade in the Maritime world. Ever growing dollar is unable to keep up with the Indian inflation because the cost of living or the practical lifestyle inflation far exceeds the rate of rise of the dollar.
Second is by investing more in equities and less in Fixed income or Debt products.
This article basically tries to give a layman's point of view of why "equity will always outperform inflation " and it is very simple to understand.
After all the inflation means rising prices of the services and products that are available in the market and which the consumer always buys.
Consider a good diversified Mutual Fund investing in all the sectors of the economy and further on with at least two companies from each sector. Now as the product prices of various goods and services increase the earnings of the companies involved will also go up and so will their share prices of the companies. Infact not only the blue chip companies, the smaller and midcap companies related to those sectors will also go up.
Along with these  what will go up will be the NAVs of your mutual funds.
It has been observed and accepted that net return of your nav will be equal to the GDP growth plus the inflation.
So now you can easily see that your return on your investments in equity MFs will almost always exceed the overall inflation .
I have two very distinct and personal examples on this.
My younger brother worked for a battery company. Seeing the scope of his job I purchased few shares of it and conveniently forgot about it.
After 13 years of getting good dividends when I sold them to foot a large family expenditure I had made enough profit to buy batteries for all the cars that I would buy later on in life.
Second is a rather sad example. Where a family member had to go on a brand of insulin manufactured in India. Seeing how many doses were being recommended by the diabetologist I purchased some shares of that company. The company has grown enough to foot the bill of the insulins for quite a few years.
If you will extend this example to the banks, auto companies that manufacture buses and cars, cement, Steel, Glass, electric wires and switch gear, water pipes, car Tyres, lubricants, medicines and hospitals, petrochemical products, gold, watches, clothing& fashion, mobiles and the list goes on...
It is obviously not possible for us to buy shares of each and every company in every sector. So the best is to buy the mutual funds  that buy these companies at the cheapest cost which means index or active which ever is possible and buy them continuously. At any given time you will be buying the company at a different price than before and even if it is higher the already purchased shares would have risen to give you good Returns.
This is the only counter measure that you have for the inability to not have unlimited income but certainly unlimited demands; which incidentally he is also the first lesson of economics books.