MUTUAL fund investors are facing a tough challenge to fight inflation that has remained high for a very long period of time.
The question that investors have is about the manner in which they can overcome this problem as it can be tough for them to ensure that they are beating inflation on a regular basis.
However, there has to be special efforts made to ensure that they are able to achieve this objective and here are a few things that can be done in this regards.
Review: One aspect that mutual fund investors can do is to review the entire mutual fund portfolio to see the extent of the risk that is borne by them on account of rising or high inflation. The risk is that the portfolio might be structured in such a way that there can be a loss being registered as inflation pushes higher. A higher inflation can lead to higher interest rates and if the portfolio has exposure to income funds or gilt funds, that are long term in nature, then the rise can impact the portfolio negatively as the net asset value of these funds decline in such a situation.
The first thing to check is the extent of the risk in the portfolio so that this can be analysed and effective steps can be taken immediately to ensure that there is not too much of a negative impact of such a position.
Asset allocation: The next step is to look at the existing asset allocation of the funds that are present in the portfolio and checking to see if there can be a way in which the situation can be improved. This will involve selling of some of the funds and then investing the money elsewhere or it could mean new contributions. The manner of operation should be such that the investor has to try and beat inflation as far as the returns are concerned.
This kind of asset allocation change is the first step in tackling the threat of a constant high inflation and it could involve a change in the manner of debt allocation or it could also lead to a higher equity exposure to areas that are not impacted by the high inflation.
Equities: One of the ways in which investors try and raise the effective rate of earnings on their portfolio is through the route of equities. However, this might not work effectively under all circumstances, especially when there is high inflation, because this could lead to a negative impact for specific sectors as well as the overall markets.
Further, there are specific sectors like autos and banks that will be hit harder when there is a persistence of high inflation in the economy. When the equity funds are chosen then this point would have to be considered and the portfolio composition requires the main attention to ensure that the efforts bear fruit.
Capital protection: There is a major mistake made by investors when they start out to tackle the menace of inflation. They believe that as long as there are positive returns, this is good way to ensure that they are achieving their objectives.
In reality, this is not the situation and hence a position where the investor locks their money into capital protection efforts is not a very smart move.
The capital protection results in a situation where the initial amount invested is protected at the end of the specific time period, therefore, while the investor is happy with assurance of having their money with them, in reality, they are suffering a loss.
The inflation in the interim period ensures that there is depreciation in the value of the money and hence there will have to be a rate of return that is equal to at least the amount of the inflation to ensure that the position remains the same for the individual.
This is essential for making the right decision while tackling the problem, otherwise they could end up in a worse situation.
