Every penny saved can help in adequately managing risks and emergencies, but only when it gets invested in a right option. But, thanks to inflation, the value of money saved over time could be much less than what is being earned. The corrosive effect of inflation is not just digging a hole in the people's pockets but is also increasing the overall cost of investments, thus, making investments a Herculean task to achieve. While it might bring good news for borrowers by lowering value of debts, inflation can be damaging to investors and pensioners by chipping away value of future interests and dividends, thereby eroding the value of accumulated capital.
In June, the inflation rose up to 5 per cent from 4.87 per cent recorded in May. It is considered as the highest rate of inflation this year, which stands above the Reserve Bank India’s medium target. But market experts expected this to rise at least to 5.3 per cent. For instance, Rs 100 earned
but not invested will be worth Rs 95 only as the ongoing inflation rate is 5 per cent. The constant rise in prices, coupled with lackluster earning growths, has limited the customer’s options like never before and they have become more reluctant with the idea to save and invest in financial markets. That’s why financial experts suggest individuals to stay on the lookout for investments whose real return rate is more than the prevailing inflation rate.
Here are some options to safeguard the investments from the prevailing inflation storm:
*Target equities/equity MFs: Long-term equities are one of the best options to beat the inflation with ease. One can either invest directly in equities or can go through mutual funds. The latter is preferred as experts manage it. It’s also advised that investors opt for diversified equity mutual fund schemes to reap higher risk-adjusted returns. But equity investments should have a horizon of at least three years and at times even longer.
Another option for lowering the inflation’s impact is by investing via systematic investment plans (SIPs). It is the compounding impact of SIPs over longer periods that easily tame the inflation by a comfortable margin.
n Invest in dividend paying stocks: While inflation can get on investor’s nerves, buying stocks that pay good dividends may calm him. Dividends are the returns paid by companies to all of its stakeholders either in form of cash or additional stock shares. Investing in the dividend-paying stocks is a smart choice when the clouds of inflation hover above our heads because these come with profitable interest rates. Whether dividends are profitable or not can simply be measured by calculating dividend yields. It can be calculated by dividing the sum total of dividends (amount to be paid by companies) by the stock price. If the value of the dividend yield is higher than the annual inflation rate, the dividend is good to invest in. Also, the real return or return net of inflation should be calculated and examined before making investments.
nInflation-indexed bonds: These are one of the reliable ways to beat the inflation as one can save big on both principal and interest rates. Inflation-indexed bonds give a constant return on investments, unaffected by inflation in the economy. Unlike fixed deposits, which also offer fixed interest rate for a given period of time, inflation-indexed bonds save investors from all macroeconomic risks involved in the times of inflation.
Whenever capital increases with inflation, the interest as well as principal gets better than what is originally promised. No doubt, inflation-indexed bonds are actually protection against inflation for the investor as he generates higher interest with every rise in inflation.
*Real assets like gold & property: The real assets such as gold and property can also be used a protection against inflation. Investors can invest in funds that invest in gold mining companies and the property. Also, investing in alternative assets such as infrastructure, student accommodation and special property is a good option for a stable and regular income with inflation linkage. These assets are based on long-term contracts with rental income whose value rises with the rise in inflation. Therefore, these offer viable inflation protection to the investor.
Equity mutual funds, dividend-paying stocks, real and alternative assets provide some of the good choices for seeking a hedge while making investments during inflation.
According to the market experts, gold and real estate are quite popular when it comes to investments during inflation. But that are ideal only for small parts of your portfolio. Spending big sum on these should be avoided.
Asset allocation is also very important. The performance of asset categories significantly differs when inflation is increasing or decreasing. Investors should focus on devising strategies on how to manage assets and reduce the risk to make portfolio stable and least affected by inflation.
A decent inflation is a good sign of a growing economy. If a nation experiences no inflation, it means the economy is weak. But when inflation begins to increase faster than income, it’s the time to become alert. If inflation keeps on rising, the cost of living also increases. The investors and stakeholders should try to foresee the long-term impact that inflation is likely to have on their money. Money should be invested in a fund that pays a higher interest than the rate of inflation to hold the purchasing power of savings tight.
(The author is founder and CEO of Finway, an NBFC)