Name: Arya Nadkar

Class: BE4-C

Roll No.: 53

PFM ASSIGNMENT - 1

1. Discuss how inflation gives an impact on investment.

Inflation refers to the general increase in prices over time, reducing the purchasing power of
money. It has a significant impact on investments in various ways:

1. Erosion of Real Returns: Inflation decreases the real value of money. If an investment
provides a return of 6% per year but inflation is 4%, the real return is only 2%. This means
that investors must seek returns higher than the inflation rate to maintain or grow their
wealth.

2. Impact on Fixed-Income Investments: Bonds and fixed deposits provide fixed returns. If
inflation rises, the purchasing power of the interest earned decreases, making these
investments less attractive.

3. Stock Market Volatility: Inflation can lead to higher costs for companies, reducing their
profit margins. Investors may react to these changes, causing fluctuations in stock prices.
However, stocks of companies that can pass on rising costs to consumers (e.g., consumer
goods, energy) may perform better.

4. Effect on Interest Rates: Central banks control inflation by adjusting interest rates. Higher
interest rates make borrowing expensive, reducing business expansion and affecting
investments in stocks and real estate. Conversely, lower interest rates can stimulate
investment by making borrowing cheaper.
5. Real Estate and Commodities as Inflation Hedges: Real estate and commodities like gold
often retain or increase in value during inflationary periods. Investors may shift funds into
these asset classes to protect their wealth from inflation.

Overall, inflation affects different types of investments in various ways, making it essential
for investors to diversify their portfolios and consider inflation-hedging assets.

2. Give any five reasons why to save money.

Saving money is crucial for financial stability and future growth. Here are five key reasons
why saving is important:

1. Emergency Fund: Life is unpredictable, and unexpected expenses like medical

2. Financial Independence: Savings provide a sense of security and financial freedom. Having
money set aside means you can make independent decisions without depending on others,
reducing financial stress.

3. Wealth Building and Investments: Saving money allows you to invest in assets like stocks,
bonds, real estate, or businesses, helping you grow your wealth over time. The earlier you
start saving, the more benefits you can gain from compound interest.
4. Achieving Life Goals: Whether it’s buying a house, starting a business, funding education,
or traveling, savings help achieve both short-term and long-term goals without financial
strain.

5. Retirement Security: After retirement, regular income stops, but expenses continue.
Having sufficient savings ensures a comfortable life after retirement, allowing you to
maintain your lifestyle and cover healthcare costs.

Developing a habit of saving ensures financial stability and provides the foundation for a
secure future.

3. While planning out personal finances, which short-term and long-term goals need to be
set?

Personal financial planning requires setting both short-term and long-term financial goals to
achieve stability and growth.

Short-Term Goals (1-3 Years):

1. Building an Emergency Fund: Setting aside at least 3-6 months' worth of expenses helps
manage unforeseen financial crises.

2. Paying Off Debt: Prioritizing high-interest debt such as credit card balances or personal
loans can improve financial health.
3. Creating a Budget and Tracking Expenses: Effective money management starts with
budgeting income and expenses to avoid overspending.

4. Saving for Specific Purchases: Short-term savings help achieve smaller financial goals like
buying gadgets, home appliances, or vacation plans.

5. Investing in Skill Development: Short-term financial planning can include investing in

Long-Term Goals (5+ Years):

1. Buying a Home: A significant long-term financial goal is purchasing a house, which

2. Retirement Planning: Investing in pension funds, retirement accounts, or mutual funds

3. Children’s Education and Marriage: Higher education and marriage expenses require early
financial planning through investment in education funds or long-term savings plans.
4. Wealth Creation through Investments: Investing in real estate, stocks, or mutual funds for
long-term financial growth helps in wealth accumulation.

5. Health and Life Insurance: Ensuring financial security with proper insurance coverage
prevents financial burdens during medical emergencies or unexpected life events.

By setting both short-term and long-term financial goals, individuals can ensure financial
stability, security, and long-term prosperity.

4. What are the key principles of Personal Finance?

Personal finance is the process of managing one's financial activities, including income,
expenses, investments, and savings. The key principles of personal finance include:

1. Budgeting and Expense Management:

Creating a budget helps track income and expenses, ensuring that spending does not exceed
earnings.

Categorizing expenses into needs, wants, and savings helps in financial planning.

2. Saving and Investing:

Investing in different asset classes like stocks, bonds, and real estate helps grow wealth over
time.

3. Debt Management:

Avoiding unnecessary debt and repaying loans on time helps maintain financial discipline.

Managing credit card usage and prioritizing high-interest debts prevents financial burdens.

4. Emergency and Retirement Planning:

Having an emergency fund ensures financial security in unexpected situations.

Planning for retirement by investing in pension plans, provident funds, and retirement
accounts ensures a comfortable future.

5. Insurance and Risk Management:

Life, health, and property insurance protect against unforeseen financial risks.
Having adequate coverage prevents financial difficulties during emergencies.

6. Continuous Financial Education:

Understanding financial markets, interest rates, and investment opportunities helps in

Staying updated with tax laws and financial planning strategies improves financial literacy.

By following these principles, individuals can manage their finances effectively, secure their
future, and achieve financial independence.