Skip to main content

What is a hedge against persistent inflation?

Download Tax Saving Mutual Fund Application Forms

Invest In Tax Saving Mutual Funds Online

Buy Gold Mutual Funds

Leave a missed Call on

94 8300 8300

 

 


Given India’s inflation history, equity despite its volatility may actually be the safest investment for an individual

 

 

Over the past 20 years starting December 1993, the wholesale price index ( WPI) registered a CAGR ( compound annual growth rate) of 6.6 per cent. Across the same time, the consumer price indices ( CPI) had CAGRs of between 7.5 and 8 per cent ( India used several CPI baskets targeting different population segments).

If those numbers are roughly accurate, we can deduce some things. One is that inflation has been consistently high. The second is that the difference between WPI and CPI has usually been between 1 per cent and 2 per cent.

The last few years have seen changes in pattern. Inflation has remained high. But the differential between CPI and WPI has widened. Since April 2011, the CPI has trended above 10 per cent and at about 3 per cent higher than WPI.

The WPI represents costs to manufacturers and wholesalers.

If they pass on cost increases and keep reasonable margins, the CPI is likely to run a little higher. Calculations are complicated because baskets have different weights for various items.

Food weighs in at almost 50 per cent of the CPI basket in the new unified CPI, while it is about 14 per cent in the WPI. This accounts for much of the widening differential. Food retail prices have shot up with 100- 150 per cent premiums on wholesale rates.

India calculates its GDP growth after adjusting for WPI.

Most nations calculate GDP growth on the basis of their respective CPIs. If India used a CPI deflator, GDP growth would be reckoned at about 1 per cent less per annum across the entire liberalisation period. Between 2011- 12 to 2013- 14, GDP growth would have dipped drastically if CPI was the benchmark.

Since the CPI reflects inflation as experienced by consumers, it is an indicator of sentiment. If GDP growth net of CPI is low, consumer sentiment trends down. This has political implications of course. Also, when sentiment is low, consumption demand drops.

Obviously, policy- makers must fix the food situation as well as tackle other causes of persistent inflation. Equally obviously, nothing tried in the past three years has worked. Massive reforms would be required across the food value chain in various states and no political party seems to have the courage.

What can the individual do to hedge against persistent inflation? Any financial plan must aim for returns above inflation. Individuals must target the CPI rate. That means aiming for compounded returns of over 8 per cent per annum, and ideally, for returns of above 10 per cent.

There are very few instruments that deliver this return consistently. Vanilla debt will never meet these needs. Bank fixed deposit rates are usually well below the prevailing inflation.

Corporate bonds might offer higher rates but the bond market isn’t well developed and there are risks of default. Debt funds offer great returns during periods when interest rates trend down but they lose money when rates go up. Given the inflation history, there are likely to be fewer periods of rate reductions compared to periods of hikes. The RBI’s new inflation- adjusted bonds are tied to CPI and offer a premium of 1.5 per cent over CPI. These instruments are being distributed via banks, which see them as direct competition to fixed deposits. So they aren’t being pushed.

Equities, gold (more broadly precious metals), commodities and real estate are the other asset classes which individuals can invest in, hoping to beat long- term inflation. The return profiles are interesting.

Gold generally doesn’t beat inflation (it doesn’t earn interest) and prices can stay flat for decade- long stretches. Once every 20- odd years, gold seems to have a massive bull run. If you get in at the right time and exit at the peak, that’s great. Commodity investing requires very smart picking and good timing. Specific commodities will beat inflation at specific times but you have to zero in on the right one at the right time.

Real estate beats inflation if it’s bought at the right stage in the boom- bust cycle. This means the buyer should wait for a price correction and, if mortgaging, buy when rates look likely to drop. But real estate is lumpy and acquisition prices can’t be averaged down in a falling market.

Equities consistently beat inflation over the long term. A passive equity index investor who is buying systematically will beat inflation over decades. He is automatically averaging price. The Sensex and Nifty have yielded CAGRs in the range of 12 per cent over the past 20 years. That is a premium of 4 per cent over CPI. Given India’s inflation history, equity despite its obvious volatility may actually be the safest investment an individual can make.

Individuals must target the CPI rate and very few instruments deliver this return consistently. Bank fixed deposits are usually below the prevailing inflation. Corporate bonds are high- risk. Debt funds are good when interest rates are down. Gold generally doesn’t beat inflation and prices can stay flat for decades. Real estate is lumpy and acquisition prices can’t be averaged down in a falling market. Equities consistently beat inflation over the long term. A passive equity index investor who is buying systematically will beat inflation over decades

 

 

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

 

 

Leave a missed Call on 94 8300 8300

 

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

 

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

 

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

 

Best Performing Mutual Funds

    1. Largecap Funds             Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds         Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds          Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds   Invest Online

      1. DSP BlackRock MicroCap Fund

2.       Franklin India Smaller Companies

E. Sector Funds          Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds      Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds        Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds         Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...
Read more

JP Morgan launches Emerging Markets Opportunities Equity Offshore Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 JP Morgan launches Emerging Markets Opportunities Equity Offshore Fund    The new fund offer opens for subscription on 16 th June and closes on 30 th June. JP Morgan Mutual Fund today announced the launch of its open end fund of fund called Emerging Markets Opportunities Equity Offshore Fund. The fund will invest in an aggressively managed portfolio of emerging market companies in the underlying fund - JPMorgan Funds - Emerging Markets Opportunities Fund, says a JP Morgan press release. Noriko Kuroki, Client Portfolio Manager, Global Emerging Markets Team (Singapore), JPMAM said, "Emerging markets have been out of favour for several years, as growth decelerated and earnings struggled. However, in a world of globalisation, we believe that EM will eventually re-couple with DM, leading to the long-aw...
Read more

Nifty F&O

  1. What is a straddle? A strategy using Nifty options usually before a major event or when one is uncertain of market direction. Comprises purchase of a Nifty call and put option of the same strike price. Usually strikes are purchased closer to the level of the underlying index. 2. What is better ­ buying or selling a straddle? It depends.Implied volatili ty of options, or near-term expectations of price swings in an un derlier like Nifty , usually peaks before an event and falls when the outcome plays out ­ like Infy re sults in past years. However, once the event plays out, a sharp rise or fall in Nifty could result in price of the straddle rising ­ benefiting buy ers. But, normally , those who sell or write options charge hefty premiums from buyers in the hope that fall in volatility would ensure the options end out-of-the-money, hurting buyers. 3. So, do straddle sellers end up winning most of the time? Yes. That's invariably the case when market volatility is trending on the...
Read more

UTI Equity Fund Invest Online

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   UTI Equity Fund   Invest Online UTI Equity is a large cap-oriented fund with assets under management worth Rs. 2,269 crore (as on June 30, 2013). The fund was originally launched in May 1992 as UTI Mastergain and is benchmarked against S&P BSE 100. A couple of years back the name of the fund was changed to UTI Equity Fund and many of the smaller funds of UTI were merged into this fund. Performance The fund has outperformed its benchmark as well as the equity diversified category average in the last one-, three- and five-year periods. It has repeated the same in 2013 (as on May 31). Since its inception the fund has delivered an impressive 26 per cent compounded annual growth rate which is superior to its benchmark performance in the same period. Y...
Read more

Good time to invest in Infrastructure Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Good time to invest in infrastructure The Sensex has gained almost 10 per cent from May 15 till date, while the CNX Infrastructure Index has gained almost 17 per cent in the period. The price to earnings ( P/ E) ratio of the BSE Sensex is 18.96; for the CNX Infrastructure Index, it is 24.57. The estimated P/ E for next year is 14.04 for the Sensex. Of the 24 companies that make up the CNX Infrastructure Index, six have a P/ E higher than 20. Does this mean infrastructure is fairly valued? Or, has it run up quite a bit? According to experts, barring stray companies, the infra sector is fairly valued and it is a good time to invest. Even if some companies are facing debt restructuring problems, once interest rates come down and regulatory norms become flexible, they will start giving good re...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now