Why buy mutual funds? You are a conservative investor, or your parents have just given you some money for your children's education to `tuck away' for a few years, or you are just not comfortable with owning individual stocks.

The worry every day about their market value as this market just roars up and down, is more than you are willing to take. You still want to do the investment laddering techniques (described last week) and have some of your money (the most that you feel comfortable investing in the market) that will OVER TIME achieve a greater return than your fixed deposits. While fixed deposits have a guaranteed rate of return, they compound far more slowly than mutual funds. So, the strategy is to use your fixed deposits for the short-term and keep your mutual funds invested over the long-term.

How does inflation factor in? We need to consider the effect of inflation. A dollar today is worth more than a dollar one year from today, which is worth more than a dollar two years from today.

Inflation eats into your savings each and every year, some years far more than others, depending upon the rate of increase or decrease in purchasing power.

Changes in purchasing power means that if all groceries that usually cost about $150 per week, suddenly only cost $100 per week because of tremendously cheap oil and a robot-controlled ship `The Oleander' (no sailors needed to run this ship); then your purchasing power has suddenly increased and the rate of inflation on groceries has gone down. Your dollar goes further. This example also assumes that the decrease in costs is passed down to you, the shopper.

What this also means is that you don't have to save quite as much of your paycheque for next week's groceries, and that means you may have an extra $200 per month to put away for the future. In reality, however, things usually cost more each year and what you have already saved is also worth less.

How do you fight this double whammy? Three ways are: To use and consume less (pretty tough with kids); To save more (pretty tough with kids); or, To do the best you can by saving what you can and invest in instruments (a fancy word for stocks, bonds, mutual funds etc) that can give you a rate of return over time that will beat the inflation rate. If inflation is running about 4.00%, your statement savings are barely keeping up with inflation when it pays 4.25%. Any rate of return on your money above and beyond that will combat the effect.

Questions, comments e-mail Martha at marthamyron y northrock.bm