What Is an Inflation Risk?
Purchasing power risk is mainly due to the inflation factor, which is closely related to the interest rate factor. If the interest rate does not keep up with the level of inflation, investing in money market funds will naturally make the income more and more worthless. As for investing in other funds, if the growth rate of income is lower than the inflation rate, it will also suffer from purchasing power risk. [1]
Purchasing power risk
- Chinese name
- Purchasing power risk
- Foreign name
- Purchasing power risk
- Alias
- Inflation risk
- Distribution form
- Cash form
- Purchasing power risk is mainly due to the inflation factor, which is closely related to the interest rate factor. If the interest rate does not keep up with the level of inflation, investing in money market funds will naturally make the income more and more worthless. As for investing in other funds, if the growth rate of income is lower than the inflation rate, it will also suffer from purchasing power risk. [1]
- It means that the profit of the fund will be distributed mainly in the form of cash, and cash may reduce purchasing power due to the effects of inflation and currency depreciation, which will cause the actual return of the fund to fall and bring the risk of a decline in the actual level of returns to investors.
- definition
- For example, the annual interest rate is 3% and the inflation rate is 5%, which means that the real interest rate is negative. When people hold 100 yuan, the year-end value is 103 yuan, but if they hold 100 yuan of goods, the year-end price is 105 yuan, that is, 100 pieces of goods that can be bought at the beginning of the year cannot be bought by the end of the year, which means currency , Or the currency s depreciation within the currency.
- Purchasing power risk is the change in the total purchasing power of an asset caused by changes in the total price level. Investors should have the ability to deal with purchasing risks wisely. Otherwise, inflation will erode the purchasing power of investor wealth.
- Purchasing power risk is different from interest rate risk and market risk, because an investor may lose purchasing power when its price continues to rise. Many investors mistakenly believe that more money becomes richer. This currency illusion makes investors ignore currency Swelling problem. Investors can only overcome the problem of currency illusions by focusing on the actual rate of return rather than the nominal rate of return, and only when the actual rate of return is positive, that is, when the nominal rate of return is greater than inflation, can purchasing power really increase.