Inflation proof investment is the need of the hour by Finway Capital

Every buck saved can be a savior to adequately manage the risks and emergencies lying ahead in the future scenes, but only when they get invested in a right option. But, all thanks to inflation, the value of bucks saved over time could be much less than what is being earned. The corrosive effect of inflation is not just digging a hole in the people's pockets but is also increasing the overall cost of investments, thus, making investments a herculean task to achieve. While it might bring good news for borrowers by lowering down their value of debts, inflation can be damaging to the investors and pensioners, chipping away their value of future interests and dividends, thereby eroding the value of accumulated capital.

In June 2018, the inflation rate rose up to 5 per cent from 4.87 per cent recorded in May 2018.It is considered as the highest rate of inflation this year which stands above the central-bank medium target.  However, the market experts expected this rise of at least 5.3%. For instance, Rs. 100 earned but not invested will be worth Rs 95 only as the ongoing inflation rate is 5%. The constant rise in prices coupled with lackluster earning growths has tightened the customer’s belts like never before and they have become more reluctant with the idea to save and invest in financial markets. That’s why the financial experts suggest individuals stay on the lookout for investments whose real return rate is more than the prevailing inflation rate. Here are investment advisory services to safeguard the investments from the prevailing inflation storm:

•    Target Equities/Equity Mutual Funds:

Long-term equities are one of the best options to beat the inflation storm with ease. One can either invest directly invest in equities or can go through mutual funds, but the latter is preferred most to be adopted as it gets managed by the experts. It’s also advised that investors opt for diversified equity mutual fund schemes in order to reap higher risk-adjusted returns. However, equity investments should have a horizon of at least three years and at times even longer than that. Another great option for lowering down the inflation’s impact is by investing via systematic investment plans or SIPs. It is the compounding impact of SIPs over longer periods that easily tame down the inflation scales by a comfortable margin.

•    Invest in Dividend-Paying Stocks:

While inflation can get on investor’s nerves severely, buying stocks which pay good dividends may calm him down. In the words of financial experts, “dividends” are the returns paid by the companies to all of its stakeholders either in form of cash or additional stock shares. Investing in these dividend-paying stocks is a smart choice when the clouds of inflation are just above our heads because these come with profitable interest rates. Whether dividends are profitable or not can simply be measured by calculating dividend yields. Dividend yields can be calculated by adding dividends (the amount to be paid by the companies) to be received throughout the year and dividing it by the stock price. If the value of the dividend yield is higher than the annual inflation rate, the dividend is good to invest in. Not to forget, the real return or return net of inflation should carefully be calculated and examined before making investments.

•    Reap the benefits from Inflation-Indexed Bonds:

Inflation-indexed bonds (IIB) are one of the great and reliable ways to beat the heat of inflation as one can save big on both principal and interest rates. IIB gives the constant returns on the investments unaffected by inflation in the economy. Unlike fixed deposits which also offer fixed interest rate for a given period of time, IIB saves the investors from all macroeconomic risks involved in the times of inflation. Whenever capital increases with inflation, the interest as well as principal gets better than what is originally promised. No doubt, IIBs are actually protection against inflation for the investor as he generates higher interest with every rise of an inch in inflation level.

•    Real Assets like Gold and Property:

The Real assets such as gold and property can also be used as real protection against inflation. Investors can invest in gold either funds investing in the share of gold mining companies and the property deriving profits from liquidity the real estate equities offer. Also, investing in alternative assets such as infrastructure, student accommodation, and special property is a good option for a stable and regular income with inflation linkage. These assets are based on long-term contracts with rental income whose value rises with the rise in inflation. Therefore, these offer viable inflation protection to the investor. 

Equity Mutual Funds, Dividend-paying stocks, Real and Alternative assets provide some of the good choices for seeking hedge while making investments during inflation. According to the market experts, gold and real estate have gained up the popularity when it comes to investments during inflation, but are ideal only for small parts of your portfolio. Spending big sum on these should be avoided, if possible. Also, asset allocation is important, too. The performance of asset categories significantly differs from when the inflation rate is increasing and when decreasing. Therefore, the rate of inflation gives a shape to investors’ portfolio. Investors should focus on devising strategies like mortgage loan against property that reduces the risk to make portfolio stable and least affected by inflation.

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Created on Oct 16th 2018 03:11. Viewed 1,306 times.

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