Investing for Inflationary Times

A key fallout of the ongoing Russia-Ukraine crisis is likely to be higher inflation across the world. We have already seen a sharp spike in prices of commodities including oil, nickel, aluminium, zinc, copper and even wheat. While the jump in prices of wheat may not affect India, as our domestic requirement can potentially be met internally, the same is not true for most other commodities. Whenever, there is a rise in international oil prices, the domestic petrol and diesel prices needs to be hiked, which in turn impacts the overall inflation of the economy. Oil constitutes a large chunk of India’s import bill. Further, there could be supply disruptions of various commodities and manufactured goods amid the geo political events, in a world recovering from the after-effects of the Covid-19 pandemic, again adding to the inflationary pressures.

While it pays to be prepared to face the inflation in our monthly bills, it may not be enough. You need to cushion your portfolio for inflation.

Real Returns Matter

Real returns, by definition, are the returns on your investments over and above inflation. For instance, if you earn a return of 5% from your investment and the inflation is 4%, you real return is 1%. In other words, your money’s purchasing power grew by 1%. On the other hand, if the inflation was 6%, your real return would be -1%, i.e., a loss of 1% of your money in terms of its purchasing power. Real return can also be called as inflation-adjusted return.

The worst thing about inflation is that we don’t even realize being affected by it while investing. Most of the Indians invest traditionally in Fixed Deposits . As per RBI’s data, the total money invested in Fixed Deposits stood at Rs.142 lakh crore as on 11th February 2022, which is nearly 3.6 times that of the entire mutual funds industry AUM. While it is ok to seek safety in our investments, many of us forget that we are subjecting ourselves to the risk of losing the purchasing power of our money when we over allocate to FDs. So it is ideal to have some exposure to FDs and other fixed income investments depending on your risk appetite.

Equities for Beating Inflation

The debate as to which asset class has the most potential to deliver higher than inflation returns in the long term is not a difficult one to settle, if we go by historical data over the past 2 or 3 decades. Equities have not just delivered positive real returns, but have also outshined other asset classes including debt and gold.

Equities could be risky in short term, like we have seen in many instances in the past. The recent fall in stock prices is no different. But over long term, the risk in equities reduces and could be mitigated too. Here are three healthy ways to go about equity investing:

• Assess your risk profile with help of an expert to understand how much equity exposure to take
• Diversification with equity oriented funds: Not all sectors or stocks are likely to be equally impacted by inflation. It’s necessary to diversity your holdings and equity oriented funds could come in handy.
• Investing the SIP way: SIPs are great to habituate yourself to disciplined investing, while also benefitting from rupee cost averaging.

Add a Little Glitter to Your Portfolio

Gold is known to be an asset that could combat inflation and not without a reason. Gold traditionally has acted as a store of wealth and protected the purchasing power of most Indian families. Since gold is priced in US dollars in the international markets and is converted to rupee when we buy or sell gold in India, it directly provides a hedge against possible depreciation in rupee. Gold as an investment is highly liquid and could be converted to cash easily. Gold on many occasions has countered the volatility in other asset classes like equities. While the rally in gold during the emergence of Covid-19 pandemic amid a sell-off in equities is fresh in our memory, the recent jump in gold prices amid the Russia-Ukraine crisis reiterates the point. So you may consider adding some glitter to your portfolio by investing in Gold ETF or a Gold Fund of Funds.

Preparing for Your Future

Inflationary times could be painful when we make our monthly budget, but being prepared helps. You need to not just keep pace with the inflation, but need to beat it over a period of time. Speak to your financial advisor today to know more or give us a call on 73974 12345.

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