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. The cost growth of such necessities that can be regarded as typical purchases for greater masses is taken into account when calculating inflation.
To combat inflation, saving is frequently thought to be sufficient even though it is only enough to get by. By investing, you can increase the value of your savings and turn them into a long-term asset. However, this only occurs when investing is done correctly.
On the other hand, it can be observed that the average cost of living in India has increased as a result of various international events, which have also had a substantial impact on our savings and long-term investments. In this situation of turmoil, here are some points to ensure that your investments are inflation proof.
Diversification is the key
The best way to protect against inflation is through diversification, and investors may want to think about investing in asset types that often outperform the market in inflationary environments. Keeping inflation-hedged investment vehicles on your watch list and taking action when you detect inflation will help your portfolio flourish when inflation occurs with any diverse portfolio.
Equities, commodities and real estate investments typical anti-inflation assets. When attempting to safeguard your investment portfolio from inflation, you might invest in a variety of asset classes. Please note that not everyone should invest in these alternative asset classes; instead, one should make decisions based solely on their risk tolerance and financial objectives.
Consider alternatives to conventional strategies
Indians continue to choose keeping a sizable portion of their portfolio in conventional investments like fixed deposits and government-backed securities. FDs, however, are not a means of accumulating wealth, nor do they shield a typical investor against inflation. The sad reality is that your purchasing power will be undermined and your assets are likely to be lost if your interest rate is lower than the country's average inflation rate.
PPFs and FDs aren't the only investment options you should consider if you want to beat inflation; you should also explore equities, mutual funds, real estate, gold, and exchange-traded funds (ETFs) in order to keep your portfolio inflation-proof and protect your money from growing inflation.
Look towards the gold investments
When interest rates are extremely low or inflation picks up, investors have historically turned to gold as a safe haven asset. Indians have long cherished gold as a form of investment and during difficult times, the yellow metal's worth has consistently increased.
However, the fact that these metal investments don't produce any income is a significant disadvantage. Precious metals can perform much worse than financial securities when interest rates increase, which frequently occurs when inflation is present in order to mitigate its impacts.
Therefore, it makes more sense to allocate up to 10% of your portfolio to these metals strategically. During moments of inflation, this modest allocation might serve as a source of strength.
Understanding inflation will help you combat it by enabling you to see how it threatens your money. To preserve your financial discipline, keep in mind that you can do monthly checks of your expenses, savings, and assets. Finally, consistently manage your finances, make financial preparations for the future, and endeavor to protect your funds from inflation.