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Beat the INFLATION

Looking for ways and means to insulate your investment from rising prices? Here are some strategies to stay tight and right


CHECKED your transport, grocery and utilities bills recently? You’d sure be losing sleep over ever-increasing prices. What’s worse, inflation figures look alarming and have already notched new peaks, fuelled by the recent hike in crude oil prices. The spiralling affect of inflation can not only derail your investment approach but also dwindle your returns. Here’s an investment guide on how you can insulate your portfolio against the menace of inflation.


CHANGE STANCE

In the current scenario of rising prices, analysts feel there is a need to review your financial plans and investment portfolio as the expenses and corpus required to achieve financial goals may increase. You need to shuffle your portfolio in such a manner that it can generate better inflation-adjusted returns. Also, you should avoid investments in illiquid assets with fixed returns as these restrict the chances of generating higher returns it’s advisable if you can try to exit from such investments and re-deploy the amount in asset classes that generate better inflation-adjusted returns.


It is, however, important that before re-adjusting your portfolio, you should keep certain factors in mind such as the cost involved for re-adjustment, risk appetite, and current and future financial needs. There are no magic bullets in investing and re-adjusting. It won’t make you rich overnight but what it will do is to significantly reduce your risk without affecting your returns. He advises that you should not re-adjust your investment portfolio in a hurry or just because of certain external reasons which are not in your control. Otherwise, you may end up losing in a big way, he cautions.


HEDGE YOUR BETS

If you feel your current investments are not generating the expected returns, you can start looking for avenues where the risk and returns are different from your existing investments. The investments, however, should not have correlation with the risk factor. Art would be a good bet, you can also invest in private equity and international funds but these are also not risk free. They come with their own share of risks. Some capital protected funds also can be looked at.


Financial Planners hold the view that investing in the right scripts is still the best hedge against inflation. Though they are vulnerable in the short run if the economy weakens, in the long run, they will yield a good inflation-adjusted returns, you can raise investment in gold. Historically, gold has proved to be the perfect hedge against inflation. So if you’re looking to leverage on gold, investing in gold mining and producing companies may also enhance returns. You may further consider other investment options such as commodity funds, arbitrage funds and capital protection bonds with partial equity exposure while re-constructing your portfolio.


TAKE A HOLISTIC APPROACH

Financial Planners believe that while attempting to beat inflation, you should build a sound portfolio of equity, debt and other investment instruments, tailored to suit your financial goals and risk appetite. For this purpose, you can compute the inflation-hedge ratio, which gives a rough indication of how well is your financial position, including how well your portfolio is protected against inflation. For instance, 1.5 inflation-hedge ratio would mean that current portfolio return is 1.5 times of current inflation. This ratio should be improved to keep your portfolio returns much higher than the inflation rate. Accordingly, you can change your investment approach and invest in higher return asset classes, such as equity, for long term and enhance the returns.


Diversification of investment is another important factor that can act as a hedge against inflation. The whole idea is not to put all your eggs in one basket. In other words, if you invest in a wide range of assets such as stocks, gold, real estate, mutual funds, bank fixed deposits and government bonds, where prices behave differently, the overall risk of your portfolio will be lowered.


THE PERFECT PLAN

In the current scenario, when commodity prices are skyrocketing, you should look to increasing inflation-adjusted returns of your portfolio. This, however, shouldn’t be the only reason for changing your asset allocation. It is ideal to ride through the volatility and not panic. But if you want to review your portfolio, it should be aligned with your goals, in a high inflation scenario, asset classes such as equities, commodities, real estate and gold should be preferred over fixed income instruments as they usually generate returns higher than inflation over a period of time.


Times are tough. But if you follow these simple steps, you may well insulate your returns from the rise in inflation.


BEAT THE BLUES

HERE’RE SOME INSTRUMENTS WHICH CAN HELP YOU GUARD AGAINST DWINDLING RETURNS

  • Arbitrage funds

  • Capital protection bonds

  • Gold funds

  • Shares Commodity funds

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