Inflation is a looming concern for the global economy, resulting in significant price increases for essential goods and services, such as oil, vegetables, clothing, healthcare, transportation, and communication. It's evident that inflation impacts our daily lives and the overall cost of living.
We must factor in this unwelcome reality as we plan our household budgets. However, adjusting for current inflation effects is not enough; we also need to adapt our savings and investment strategies to manage inflation in the future effectively.
Here are some tips that can help you counter the negative impact of inflation and don't necessarily mean spending more money on investments, though that never hurts.
Real returns represent the actual growth of your investments after accounting for inflation. For example, if your investment yields a 5% return but inflation is at 4%, your real return is only 1%, indicating that your purchasing power has increased marginally.
Conversely, if inflation rises to 6%, your real return becomes -1%, meaning your purchasing power has decreased by 1%. These real returns, also known as inflation-adjusted returns, are crucial for understanding the true value of your investments.
Unfortunately, many investors overlook real returns, with a significant number of Indians favouring Fixed Deposits (FDs) as their primary investment. As of 11th February 2022, the total amount invested in FDs was a staggering ₹142 lakh crore—approximately 3.6 times the assets under management in the entire Mutual Fund industry.
While it's understandable to prioritise safety in investments, over-reliance on FDs can lead to a decline in purchasing power. Therefore, it's essential to explore more profitable investment options, especially during periods of high inflation.
Historical data from the past two to three decades shows that equities not only provide positive real returns but also outperform other asset classes, such as debt and gold. This positions equities as one of the most promising investment options during inflationary periods.
While equities can be volatile in the short term, as seen in recent stock price fluctuations, the long-term outlook generally mitigates this risk. Here are three effective strategies for investing in equities:
Gold has long been considered a hedge against inflation. It has traditionally acted as a store of wealth and protected the purchasing power of most Indian families. Since gold is priced in US dollars and converted to rupee when we buy or sell gold in India, it directly provides a hedge against possible depreciation in rupee.
Gold as an investment is highly liquid and could be converted to cash easily. Further, gold has also countered the volatility in other asset classes like equities on several occasions. Gold's rally during the COVID-19 pandemic and the recent price jump amid the Russia-Ukraine crisis reiterate the point.
Consider adding some glitter to your portfolio by investing in a Gold ETF or Fund of Funds. They can serve as an ideal investment during inflation-heavy times.
Inflationary times could be painful when we make our monthly budget, but being prepared helps. With suitable investments, you cannot only keep pace with the inflation but also outright beat it. You can start investing in Mutual Funds through the Investment Services Account with HDFC Bank, which can go a long way towards helping you make investments at the right time. Just log in through your NetBanking, go to the Mutual Funds options, click on request, and open Mutual Funds ISA Account.
Click here to open your ISA today!
Read more here on why it's time to start tax planning for 2022-23
*Terms and conditions apply. HDFC Bank is not indicating or guaranteeing returns on any investments. Readers should seek professional advice before making any investment-related decisions. HDFC Bank is an AMFI-registered Mutual Fund distributor. Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.