We talked about how the current inflation rate is more than the Reserve Bank of India’s (RBI) mandated inflation band of between two to six per cent. The risk-averse investors are finding it difficult to save and invest their money as many of them offer returns that barely exceed the inflation rate. In an earlier piece written on investment options to reduce the inflation impact, we explained how investing in inflation-indexed bonds (IIBs) helps.
You may have felt the pinch of inflation while shopping for your daily grocery items. The effect of inflation is not temporary, which means that you must have a long-lasting investment solution with a permanent effect. Not many realize that one can tackle inflation with the right asset allocation strategy. This means that you can allocate a part of your earnings to various strategies including equity investments, gold and commodity funds.
Rush towards equities
Other than the amount that you have accumulated and stored in your emergency fund, ensure that you invest a major portion of your earnings in equity investments that earn market-linked returns. You can choose to invest in a lump sum or systematic investment plan (SIPs). The idea is not only to keep investing in equity but also to stay invested in it. If you are looking to relieve yourself from the impact of inflation, stepping up your equity investments may be one way to combat the fears of not having enough money in future.
Invest in gold
How many times have we heard our elders describing the yellow shining metal as the perfect hedge against inflation? However, instead of buying physical gold, you may consider putting your excess money in sovereign gold bonds (SGBs) or gold mutual funds or gold exchange-traded funds (ETFs). With the price of gold quickly rising in response to inflation, it makes sense to put away a part of your money in gold. Historically, gold has always been deemed to be the best answer to inflation considering its historical returns that have been more than that earned from other asset classes.
Try commodity funds
Not all can invest in commodity stocks, thus, leaving you to invest in commodity funds, which like mutual funds, are essentially a portfolio, albeit of commodities. With the prices of commodities skyrocketing in the event of the current inflationary scenario, it is obvious that these commodity funds will yield exemplary returns in future. However, a lot needs to be done to inform and educate people in India about commodity mutual funds that have not found due recognition unlike other asset classes like stocks, gold, mutual funds, real estate, etc.
Refrain from debt instruments
Many risk-averse investors cosy up to debt funds and instruments promising fixed returns. However, despite the risk-free nature of these instruments, investors must ask if the returns earned are high enough to beat inflation. Investors must also look at the returns post-tax perspective considering how the same would be much lower than what gets spent or lost due to inflation.
Inflation is a reality. To tackle the same, you must adopt ways that help mitigate its effect. Also, the right asset allocation strategy will help you distribute your funds and cash reserves in a way that your money does not sit idle. You have worked a lot to earn your money. Now it’s time to put that money to work.