5 Tips To Be Inflation-proof

5 Tips To Be Inflation-proof

A funny but powerful way of defining inflation – ‘It happens when everything gets more valuable, except money!’

The consistent increase in the prices of basic goods and essential services squeezes out all the money from our hands. Inflation in a high growth and developing economy like ours continues to remain a worry for all. In the past, we have had governments being given a pink slip owing to steep rise in onion prices and you must be familiar with the bandh last year to protest against inflation. While efforts are made by the central bank and government alike to keep the price rise under check, what do we do to safeguard ourselves against inflation which smartly keeps reducing our savings?

Food for Thought:

It is never too early or too late to invest! World’s greatest investor, Warren Buffet started investing in shares at the tender age of 11.

I. WHY NOT DEPOSITS

We know that in order to restrain the inflationary pressures, the central bank hikes the interest rates. As a result, depositors enjoy higher interest rates on their fixed term deposits. But here lies a catch!

Did you know? - Inflation reduces the real value of your money.

For example, you bought a food item at INR 100 in 2010. Assuming an average food price inflation of 10%, this food item will cost you INR 110 today. Thus, though your expenses are still the same, you are spending more! The same principle applies to your deposits which should yield you more returns.

In effect, your fixed deposit rate (x) should be more than inflation (y) to effectively beat the 10% price increase. Therefore, your real or actual return is (x-y) should match or exceed the ‘inflated’ cost of living which is often not the case. A fixed deposit generating 10.5% is actually yielding only 0.5% on your money.

II. NEW PENSION SYSTEM (NPS)

Today’s generation wants to retire early, has limited or no post employment pension and intends to live a self-indulgent life. Building an adequate corpus to take care of expenses and a comfortable livelihood after retirement is important; moreover, because inflation erodes the corpus value. Therefore, an extremely cheap annuity plan like NPS is a viable option.

III. DIVERSIFY INTO EQUITY ASSET CLASS

As proven by the past market cycles, despite the short-term fluctuations, the returns generated from equities supersede other asset classes in the long term. Thus, the portfolio strategy to beat inflation is significantly aided by allocation to equities.

Plus, it is better for you to have a diversified portfolio of stocks or invest in a diversified equity fund without a sector or industry bias. Contrary to the depositors, higher borrowing rate by banks deeply impact the credit requirements of corporate and individuals. So sectors such as Real Estate, Infrastructure and Power which require huge liquidity to supplement their long gestation plans are greatly affected.  Despite this, there are sectors which source raw materials such as food grains and industrial metals, and offer essentials like utilities, health and personal care on which individual and industry depends on, would continue to function the same way. In fact, companies that produce these primary goods would benefit from the price rise.

IV. ALTERNATE OPTIONS: COMMODITY INVESTING

Investing into agriculture-based funds is another option for you.  There are also commodity funds which invest in companies related to agriculture, precious metals (read gold), energy, metal and mining industry. But commodities prices are highly cyclical and are subject to macro-economic policies, geo-political environment, and consumption demand. In case of global commodity based funds, currency risk is also applicable. However, if you are an aggressive investor then you can include these funds in you supplementary portfolio. 

V. GOLD – TRADITIONAL HEDGE

We have a significant allocation to Gold albeit in jewelry form. With the emergence of ETFs and Gold feeder funds, people are gradually looking at the yellow metal for investment. It also serves as a hedging tool during uncertain times. Presently, the steep rise in Gold price is due to the slow recovery in the developed markets.  However, you have to bear in mind that Gold does not generate interest income or pay dividends so it is more of the appreciation in value that would actually benefit your portfolio.

Apart from these 5 investment avenues, REAL ESTATE can also generate inflation adjusted returns in form of rental proceeds. However, we have not included property investments as it is quite cumbersome, less liquid and requires big ticket size.

Over a period of time, wealth creation is an eventuality and concern, not just to surpass the price effect but also to support your lifestyle needs particularly, post retirement. If you start investing early in life, the magic of power of compounding would help you grow your net worth sizably. Even if you haven’t started yet, a disciplined approach and regular investing would bring handsome gains.