Although the word “inflation” makes us all cringe, it is a necessary part of every economy. Compared to deflation, which is the reverse of inflation, low to moderate inflation is thought to have more favorable effects on the economy. However, there are instances where inflation picks up, resulting in a generalized state of panic. We might refer to the current stage of the Indian economy as “transitory inflation.” Our finances and savings are under pressure due to an increase in total prices for everything from fuel to food and edible oil. Investors must take action to ease their inflation fear in order to combat a challenging moment like today. Protecting their money’s present and future values should be the main goal of their investing plans during an inflationary period.
What Is Inflation
Simply explained, inflation is the progressive decrease in the purchasing power of your money accompanied by an increase in the cost of everything around you. Consider the price of any household essential you have been purchasing over the past few years and how much it has gone up in price to have a better understanding of this.
From INR 15 per litre in the year 2002 to INR 48 per litre.— the price of milk now — the cost of milk soared. Here’s why it’s important to use examples of staples like these: The cost growth of such necessities that can be regarded as typical purchases for greater masses is taken into account when calculating inflation. This indicates that your household’s inflation rate may change.
Effect On Various Assets Classes
You can choose the best assets by being aware of how different assets respond to inflation.
Fixed Rate Investments
Due to the fact that inflation’s effects on returns compound with time, long-term fixed-rate investments are more vulnerable to inflation than short-term ones. Both principle and interest rate repayments lose value as a result of inflation.
Commodities
When inflation increases, commodity prices rise, making hedging more effective. Against inflation, gold and other precious metals are havens. In addition, throughout the inflationary period, the cost of other commodities such as real estate, raw resources, and agricultural goods also rose.
Real Estate
Historically, real estate has performed remarkably well during times of high inflation. By purchasing tangible assets or REITs, investors can make investments in this asset type.
Bonds
In times of extreme inflation, inflation-indexed bonds with variable interest rates are favored over fixed-interest bonds. Bond returns that are indexed to the CPI provide a superior inflation buffer.
Stocks
Of all the asset classes, stocks offer the highest returns after adjusting for inflation. Businesses in the consumer staples category, for example, increase their profit by passing on to customers the increased input cost caused by inflation.
Why Is the Current Inflation Scenario In India a Worry?
The Indian economy is currently experiencing growing inflation. There are a number of causes behind that. The entire economy has been impacted by COVID, which has disrupted global supply chains and output. Demand has suddenly increased as nations attempt to return to normal. Due to the Russia-Ukraine war, commodities prices, including crude oil, are rising. Vegetables and other basic goods have seen their prices soar as a result of the surge in crude oil prices. As a result, the cost of LPG and petroleum products has also increased. With three consecutive months of inflation above the 6 percent threshold, India’s current inflation rate has reached a 17-month high of 6.95 percent maintaining a three-month streak of being above the 6 percent threshold.
Vegetables, oil, and fat, as well as meat and fish, have seen an increase in retail inflation, according to the consumer price index. The RBI recently increased its 2022–23 fiscal year inflation prediction from 4.5 percent to 5.7 percent.
The Most Effective ways to Beat Inflation
When a difficult period is coming, investors get ready to protect their money. best investment tactics While inflation is gripping the economy, it is important to carefully consider all of the available options.
Stocks are Preferable
Equities historically had offered the strongest protection against increasing inflation. When a company’s product prices rise due to inflation, its income and profit increase. Both the corporation and its investors benefit from this. Equity investments aid investors in long-term wealth accumulation and rise in purchasing power.
Moving Above Fixed
Investments with set rates are the most stable, but in circumstances like this, fixed-rate returns don’t increase fast enough to outpace inflation. A variable rate is therefore a preferable choice.
Loans become more expensive when inflation rises, and the interest rate on the floating rate bonds rises as well. By shifting their portfolio allocation toward floating-rate investments, investors can combat the negative consequences of inflation.
Using Commodities as Hedge
Commodity prices typically rise along with inflation in the economy. A number of commodities, including gold, metals, real estate, some stocks, and bonds, serve as excellent inflation hedges. Similar to floating rate bonds, investing in consumer items can ease your inflation worries.
Last Word
Investing in a volatile market exposes you to more risk. Now is the moment to choose carefully. Keep to your investment strategy and the timeframe you have set. Investors should keep making continuous investments, especially if their time horizon is lengthy. With the above-mentioned guidelines, think about diversity and rebalancing for risk management.