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How to Beat Inflation with Your Investment?

ICICI Securities 24 Feb 2022 0 COMMENT

A rupee today will not buy the exact value of goods in the future ten years. This is because of the impact of inflation. Inflation refers to the increase in price over a specific period. As a result, a certain sum of money will buy fewer goods in the future than today. For instance, Rs 100 will be worth only Rs 94 next year if not invested wisely, and the average inflation rate is 6%. Therefore, consider the corrosive impact of inflation on your savings, and choose investments that can likely offer inflation-beating returns in the long term. Here are some options you can consider when investing in the marketfor protection against inflation.

Important Factors to Beat Inflation with your Investment

  • StocksInvesting in the stock market is a promising investment avenue if you are looking for long-term, inflation-beating returns. In the short term, stock investments are subject to high market volatility. However, in a long time, the returns are usually higher than the inflation rate. For instance, during the onset of the COVID-19 pandemic, the Sensex (stock market performance index) had dropped to 25,000 points in March 2020. At the beginning of 2021, the market picked up, and Sensex had already crossed 51,000 points. The precise returns from stock market investments depend on the individual stock performance. But, if you create a diversified portfolio with carefully selected and highly credible stocks, you are more likely to get returns that can offset the impact of inflation in the long term. 
  • Equity mutual funds: If you want to invest in the stock market but have a low-risk tolerance, you can choose equity mutual funds for protecting your money against inflation. Equity mutual funds invest 60% of your money primarily in equity and related securities. The average 5-and 10-year returns of equity mutual funds are 10%. These mutual funds are managed by a proficient fund manager, who strategies to maximise returns by creating a diversified portfolio. The fund manager will spread your equity mutual fund investments across companies, sectors and market capitalisation (large-, medium- and small-cap). Even though there is some degree of risk associated with equity mutual funds (because of their dependency on the market), the risk is significantly lower than individual stock investments. Another method to lower your risk is by investing in these funds through the SIP (Systematic Investment Plan) mode. In a SIP, you contribute a fixed sum in the scheme across a specific tenure at a pre-defined frequency. The compounding effect of equity mutual fund investments will help you balance inflation by a comfortable margin. Further, equity mutual fund investments – ELSS (Equity Linked Saving Scheme) – are tax-exempt under Section 80C of the Income Tax Act, 1961. 
  • Commodities: Commodities refer to investments in precious metals, grains, oil, foreign currencies, natural gas and other financial instruments. Commodity investments can help hedge against inflation because a rise in the inflation rate simultaneously leads to a surge in commodity prices. However, commodity investments can be exceedingly volatile. The chances of inflation-beating returns are significantly high, but so is the incidence of risk and loss. 
  • Real estate: Investing in real estate, directly or indirectly, can potentially provide a hedge against inflation. Real estate assets have intrinsic value, offer consistent income and are a natural shield against inflation. Real estate prices move with inflation because of its scarcity and necessity. The value of real estate increases with inflation similarly to commodities. However, real estate assets are illiquid. As an alternative, you can consider investing in real estate investment trusts (REITs). REIT is a company that owns and operates real estate assets. REIT shares are traded on the stock exchanges, and you can buy these shares to invest indirectly in real estate. 
  • Gold: The scarcity of metal pushes the prices of gold upwards. You can invest in gold by buying physical gold or opt for alternative investment options like gold bonds, gold exchange-traded funds, gold savings schemes and digital gold. However, gold investments do not offer constant cash flow and might involve additional investment expenses.

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Conclusion

As a wise investor, understand all options available and how each investment in the market functions. Further, assess your risk tolerance, investment horizon and financial objective to choose an appropriate inflation-protective investment.

Additional Read: How to multiple your investment?

Disclaimer:

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.