Some options for the risk-averse in times of rising inflation
The term inflation refers to a rise in the general price levels. Inflation is measured by an index which is calculated by taking into consideration a set of goods and services, and then the prices of the items in that set are compared to prices one year ago. In India, inflation is measured based on the wholesale price index (WPI) which measures the change in prices of a selection of goods at wholesale rates.
Inflation gradually reduces the purchasing power of your money and therefore it becomes very important for investors to understand the impact of inflation on their investments. Investors, especially senior citizens, put a lot of emphasis on the safety of their principal amount and in the process they sacrifice the yield on investments. For example, if an investor deposits his money in a savings bank account which generates 3.5 percent per annum and the inflation rate in the market is around seven percent, he is making a bad choice as his purchasing power is increasing by only 3.5 percent whereas prices of goods and services are increasing by seven percent.
Here are some options for an investor to counter inflation:
Real estate investment trust (REIT)
Historically, investments in real estate have worked as a good hedge against inflation. Carefully-selected real estate properties provide high returns. However, real estate investments are huge. REIT is like a mutual fund and investors can buy units of REITs. Therefore, REITs enable all investors to buy shares in a company that invests in large-scale real estate projects and multiple buildings. REITs are not available here but with the recent SEBI's draft proposal on REIT, the way for real estate mutual funds is getting cleared.
Equity
Another way to hedge against inflation is to invest a certain portion of your funds in equities. Senior citizens and risk-averse investors should also invest a small percentage of their investment portfolio in equities. Investments in equities may not necessarily be only through stocks; investors can do it through equity or balanced mutual funds too.
Commodity
Investments in precious metals (gold, silver and platinum) are another popular way of hedging against inflation. However, investors should keen in mind that prices of precious metals can be quite volatile. Therefore, investments in precious metals would be a good addition to one's investment portfolio as a hedge against inflation if it is purchased at the right time.
Measures to control inflation
Controlled inflation is good for the economy as it increases the motivation level of people. The Government, in consultation with the Reserve Bank of India (RBI), decides the inflation threshold in the economy (current inflation threshold range is 4-5 percent). The inflation target is one of the key parameters that go into determining fiscal and monetary policies of any country. Inflation has gone up from the four percent levels to around the seven percent levels over the last few weeks. The main reasons for rising inflation are supply side concerns of some of the basic commodities (vegetables, edible oil, FMCG goods etc) and speculation by traders in the market. The Government and the RBI are taking many measures to control inflation. The RBI has tightened the liquidity in the market by increasing the cash reserve ratio (CRR) and the Government has banned the export of some commodities (rice etc) and importing others (edible oil etc) to increase the supply in the market and hence control the price rise.
The term inflation refers to a rise in the general price levels. Inflation is measured by an index which is calculated by taking into consideration a set of goods and services, and then the prices of the items in that set are compared to prices one year ago. In India, inflation is measured based on the wholesale price index (WPI) which measures the change in prices of a selection of goods at wholesale rates.
Inflation gradually reduces the purchasing power of your money and therefore it becomes very important for investors to understand the impact of inflation on their investments. Investors, especially senior citizens, put a lot of emphasis on the safety of their principal amount and in the process they sacrifice the yield on investments. For example, if an investor deposits his money in a savings bank account which generates 3.5 percent per annum and the inflation rate in the market is around seven percent, he is making a bad choice as his purchasing power is increasing by only 3.5 percent whereas prices of goods and services are increasing by seven percent.
Here are some options for an investor to counter inflation:
Real estate investment trust (REIT)
Historically, investments in real estate have worked as a good hedge against inflation. Carefully-selected real estate properties provide high returns. However, real estate investments are huge. REIT is like a mutual fund and investors can buy units of REITs. Therefore, REITs enable all investors to buy shares in a company that invests in large-scale real estate projects and multiple buildings. REITs are not available here but with the recent SEBI's draft proposal on REIT, the way for real estate mutual funds is getting cleared.
Equity
Another way to hedge against inflation is to invest a certain portion of your funds in equities. Senior citizens and risk-averse investors should also invest a small percentage of their investment portfolio in equities. Investments in equities may not necessarily be only through stocks; investors can do it through equity or balanced mutual funds too.
Commodity
Investments in precious metals (gold, silver and platinum) are another popular way of hedging against inflation. However, investors should keen in mind that prices of precious metals can be quite volatile. Therefore, investments in precious metals would be a good addition to one's investment portfolio as a hedge against inflation if it is purchased at the right time.
Measures to control inflation
Controlled inflation is good for the economy as it increases the motivation level of people. The Government, in consultation with the Reserve Bank of India (RBI), decides the inflation threshold in the economy (current inflation threshold range is 4-5 percent). The inflation target is one of the key parameters that go into determining fiscal and monetary policies of any country. Inflation has gone up from the four percent levels to around the seven percent levels over the last few weeks. The main reasons for rising inflation are supply side concerns of some of the basic commodities (vegetables, edible oil, FMCG goods etc) and speculation by traders in the market. The Government and the RBI are taking many measures to control inflation. The RBI has tightened the liquidity in the market by increasing the cash reserve ratio (CRR) and the Government has banned the export of some commodities (rice etc) and importing others (edible oil etc) to increase the supply in the market and hence control the price rise.
