Legendary investor Warren Buffett famously said last year that the inflation swindles almost everyone. From meeting short-term goals to saving for retirement, inflation can spoil all your investing plans.
“Inflation swindles equity investors. Inflation swindles the bond investor, too. It swindles the person who keeps their cash under their mattress. It swindles almost everybody,” were the prophetic words of Mr Buffett in July 2022.
Inflation is forecast to average 6.7 per cent in 2022-23 and 5.2 per cent in the first half of 2023-24, says an RBI (Reserve Bank of India) estimate.
And in the high inflation cycle, it is recommended to re-look at your investing strategy and even tweak your asset allocation to align with changing circumstances, suggest wealth advisors.
Let us find out how can one invest wisely and battle with inflation at the same time.
Fixed income instruments
When interest rates are on an upward spiral because of high inflation, one can allocate some of the money to fixed income instruments such as fixed deposits since they have become more lucrative lately, advise wealth advisors.
“The peak of Inflation is behind us and next financial year inflation projections are within RBI’s target band. We are almost at the end of the rate hike cycle. These are extremely good times for debt and investors should now allocate larger share to fixed income portfolios. High quality debt portfolios are yielding 7.50 percent and provide attractive risk reward ratio,” said Ajaykumar Gupta, president and chief business officer of Trust Mutual Fund.
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“These returns can be further enhanced if investors stay locked in for three years and avail LTCG benefits. Investors with shorter horizon can also expect potential capital gains from debt investments as and when RBI starts cutting rates,” he added.
Re-look at your future goals
Besides investing in fixed income instruments, one must factor in inflation to re-assess financial goals and invest money in accordance with the changed circumstances. For this, one can use any good online calculator to compute the future value of your current investment. One can use a retirement calculator or an SIP calculator.
“Inflation is one of the silent destroying factors of our wealth. One has to recalculate the future cost of all your financial goals according to the current inflation rate. This applies mainly to short-term goals like vacation planning, Vehicle purchase, and house renovation which is a year-long goal. You need to start investing more toward your short-term goal so that you can easily adjust to the inflated future cost of these goals,” said Preeti Zende, a Sebi-registered investment advisor and co-founder of Apna Dhan Financial Services.
Long term goals
When it comes to long term goals, one must choose equity over fixed income instruments since the former gives inflation-hedged return unlike fixed deposits (FDs) and bonds.
As a matter of fact, one can make the most of market correction by investing in good quality businesses during such times. “Take the advantage of the correction in the market and invest in good quality business at the right valuation for long-term inflation-hedged returns,” said Zende.
“In order to meet long term goals, one should not stick to the fixed-income product where after taxes and inflation the return is negligible or even negative,” she adds.