With inflation nearing double digits, you've got to review and plan your investments to increase your real returns.
Inflation is hovering close to double digits and food inflation rules around 17.65%. This means, your investments have to earn double-digit returns merely to ensure that your savings retain their value. On his part, RBI governor has hiked the cash reserve ratio and repo rates by 25 basis points to fight inflation. Here are some ways for you to slug it out with the inflation demon.
Equities
Attack is the best defence. Traditionally, equities are known as the best defence against inflation. When you invest in a company, you are offering risk capital to that company. The company invests the money in various businesses with a view to generating returns that comfortably beat the inflation and reward shareholder with superior rate of returns. The economy is just recovering and with demand picking up, corporates should report higher earnings growth. Hence, investment in equities should help tackle inflation and pay off from a medium-to-long-term perspective. Ownership of business that generates superior return on capital invested leads to creation of wealth for the shareholders. Compounding along with substantial positive real returns ensure that inflation does not eat into the accumulated wealth.
Fixed Deposits
Fixed deposits must be seen in the context of prevailing inflation. When the inflation quotes at 10%, a fixed deposit at 7% rate of interest burns your money as the purchasing power of your money goes down due to negative real rate of returns. Hence, it is better to choose a vehicle that offers the best possible post-tax returns with high liquidity. It makes sense to study the interest rate cycles and short and long end of the rate curve before committing money here. After all, it must be noted that one can park the emergency funds here betting big on the low risk involved and ample liquidity.
Commodities
If you can't fight them join them. Going forward, emerging economies like India, will consume more energy and agricultural commodities for their growth. In this scenario, investors could look at going long on commodities. HNI investors in India to take advantage of the $200,000 facility [the government has provided] to buy agricultural and oil commodity ETFs abroad. Energy and food are the major components of an inflation index. Hence, one must look at hedging oneself by looking at ways to buy into those commodities. She recommends buying into an energy mutual fund or an agricultural fund for retail investors, though there are limited options in the same for retail investors. High net worth investors (HNIs) or sophisticated investors could look at buying agri-commodity futures on the MCX, though the transaction costs in the derivatives market could be high.
Real Estate
Several analysts believe real estate is strong bet against inflation since it is a real asset. So far house prices have proved this theory right. If financed with a loan, this is even better because the principal component does not increase but its real value declines due to inflation. We encourage clients to take advantage of the current low interest rates to buy real estate. So if you already have a house with a loan taken at a low interest rate on it, you could hold on to it and this could act as an inflation hedge. However, a word of caution — one must remember that one of the reasons for the global crisis was that real estate prices became an asset bubble. However, with the Indian economy being intact and the GDP expected to grow at 8.5%, inflationary pressures should drive up house prices in the future.
Gold & Precious Metals
The yellow metal has been the traditional hedge against inflation. For centuries, gold has managed to help individuals to maintain their purchasing power. Gold has limited industrial use and barring the consumption use towards jewellery there is little scope for gold to be consumed. It is seen as a monetary asset worldwide that acts as a quasi-currency. It is seen in the past that the gold does well when the uncertainty goes up and vice-versa. Post March 2009, though the world economy has seen good recovery gold has not lost much value, indicating an undercurrent that expects higher inflation as a by-product of the economic recovery arising out of stimulus. As the inflation across the globe rises, gold prices are expected to do well. In the recent past, the advent of ETFs has helped the Indian investors to take a position on gold with minimum transaction cost and with least tax burden. A point to note is that if Indian rupee hardens against the greenback, then Indian gold investors may not be in a position to enjoy the upside fully. Of late, platinum has also attracted investor attention in precious metal.
