What investments can an early investor make to beat inflation?

Vimal Joshi
Updated: 15 Dec 2021, 05:01 PM IST
TL;DR.

When you look forward to making investments to earn an income that can beat inflation, you should be choosy about where to park your funds. We decode some of the most viable investment options that will help you beat inflation.

If your goal is to beat inflation, you can make investment in a number of savings instruments.

If your goal is to beat inflation, you can make investment in a number of savings instruments.

When you invest a part of your savings into fixed income instruments such as fixed deposits or bonds, you must bear in mind that your real return is what will be left after deducting the rate of inflation.

For instance, if FD interest rate is 5 percent and inflation hovers around 5.3 percent per annum, this means your real return is in the negative range of 0.3 percent. It is, therefore, imperative to invest savings into such investments, which fetch you returns at a rate higher than that of inflation.

If your goal is to beat inflation, you can make investment in a number of savings instruments. Although there could be some high yield investments that might decline in value for some time, in the long run, these investment options are certain to stay ahead of inflation.

“One of the most effective ways to beat inflation is to invest in equity in various ways such as through mutual funds, or index funds. One must ideally constitute a portfolio with the majority of funds allocated to equity and some part to bonds,” says Deepak Kumar Aggarwal, a Delhi-based investment advisor and chartered accountant.

We list out some of the most popular investment options that would help you beat inflation:

 

1 Equity mutual funds: There are various kinds of mutual funds such as debt, equity, index funds, etc. Out of these, the equity mutual funds, especially the large and mid-cap funds are more likely to beat inflation than the debt funds.

Mutual funds allow you to invest in a basket of stocks collectively with hundreds of other investors. As the fund grows in size, your share in the fund also rises proportionately.

You can either make investment in a number of stocks and maintain your own portfolio, or invest in a fund, which is a form of passive investment where trained and expert fund managers take investment decisions on your behalf for a small fee.

2 Gold: In the long run, gold tends to beat inflation. Also, it is a liquid asset and trusted by Indian families for generations. Some sceptics argue that investment in gold is not foolproof because one loses money in making charges, etc. and there could be some cost one has to bear in storing physical gold in lockers, etc.

However, those who are apprehensive about storing physical gold can explore the option of buying gold ETFs which are traded in the stock exchange and track physical gold. So, with gold ETFs, one can marry the perks of gold investment with flexibility of tradable stocks.

3. Stocks and bonds in the right proportion: Sometimes, relying only on stocks to run past inflation can be somewhat risky. So, experts advise that some proportion of your portfolio should be allocated to bonds. Ideally, this ratio could be 60/40 which means 60 percent of your investments to be allocated to equity and 40 percent to bonds/ debt.

Although the debt investment would earn a fixed rate of interest, it can work as a hedge against the risky investments in stock.

4. Index funds: The index funds are a viable way to beat inflation. The most common indices in Indian stock markets include Nifty and Sensex. One can choose to invest into funds that are mapped to these indices. In the long run, these indices rise, and it is a prudent way to stay ahead of inflation.

In fiscal 2021, Nifty Bank index posted a growth of 83 percent and Nifty IT gave a return of 115.64 percent.

There are several mutual funds that track index funds such as Tata Index Fund Nifty Direct Plan, HDFC Index Fund-Sensex Plan and IDFC Nifty Fund Growth.

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One should make some smart investments to beat inflation, 

5. Cryptocurrency: It is an age-old maxim that one should move with the times. As times have evolved and investment in cryptocurrency is considered to be a vital part of the new-age portfolio. So, it is important to keep some investments in the likes of Ethereum, Bitcoins, Tether and Cardano.

So, we can summarise that one should maintain a strong portfolio of investments to include a blend of assets such as gold, cryptocurrencies, equity funds and index funds. Based on your risk appetite, you may raise or cut down your allocation to different asset classes. However, whatever you decide to do, make sure that you stay ahead of inflation.

 

First Published: 15 Dec 2021, 05:01 PM IST
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