Inflation is the result of more money chasing fewer goods, leading to a disparity in the demand and supply. It hits you, where it hurts the most – your pocket. This inflation eats away your purchasing power and reduces your propensity to save. For instance, if you invest money in a fixed deposit (FD), which gives a return of 9% and the rate of inflation is 9%, you are not earning anything on your investment. Here’s how you can defeat this hydra headed monster called inflation:
Plan your expenditure:
With our new-age salaries, knowingly-unknowingly we are spending exorbitantly, leading to a rise in prices resulting in a rise in inflation. Inflation is not under your control, but your expenditure sure is. Do not go over the top with your purchases. Inflation first knocks out items of regular consumption. To begin with, you can cut down on inessentials when buying groceries and items of daily chores, and look for lower priced alternatives to items that you regularly purchase.
Invest in equities:
It has been historically proven that equity investments gets the better of inflation in the long run. You can invest directly in equity stocks. First time investors, sceptical of the stock market risks can invest through equity mutual funds. Both have their upsides and downsides. The key is to invest and be invested. You can invest in blue-chips & good quality mid-cap stocks or mutual funds with good track records over a longer term.
Choose debt instruments wisely:
Debt instruments are essentially money given on a loan to an entity, e.g. the government, government backed organisations or a company. Hence the nomenclature – debt. If equity markets scare you, you can park your money in debt instruments. This asset class includes bonds, National Savings Certificate, Public Provident Fund (PPF), Corporate Deposits, Employee Provident Funds (EPF) and even Fixed Deposits (FD) amongst others. For risk averse investors, debt is a plausible alternative to the volatile equity.
Invest in real estate – Property appreciates:
Having an additional property and earning rent from it is a boon when inflation sets in. Though there is no ‘property index’ to support this, inflationary periods in India have usually been accompanied by rising prices of real estate. By investing in real estate you can enjoy a twin benefit – capital growth due to appreciation and rental income earnings.
Invest in gold:
During times of inflation, you can take refuge in gold. Gold is certainly a hedge against the high and sticky inflation over a long term. This is because the factors that affect gold are different from those that affect the prices of other assets. For instance, during the financial crisis, world gold prices shot up drastically. You can buy gold bars, gold mutual funds, ornaments, Gold Exchange Traded Funds (ETFs), etc
As an investor you have to keep a tab on all your investments. Inflation can sometimes even at into the returns offered by assured return schemes like fixed deposits and small savings schemes, thereby, leaving you with dismal real returns. Hence, it would be negligent to put all your eggs in one basket.