Inflation is a macro-economic indicator that impacts your finances and investments directly. While it curtails your spending power, inflation also eats into real returns. In the current situation, fixed income instruments such as fixed deposits are particularly affected as the rate on inflation is higher than the returns these instruments give. This means that you are actually losing money. Savings accounts, government bonds, and other fixed return instruments provide lower returns. As the inflation rate spikes, returns should also ideally increase to match the soaring prices. “For fixed income, as interest rates go up, the value of existing fixed income instruments comes down,” says Prasant Bhansaali, director, Mehta Equities.
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Moreover, inflation has a ripple effect on every aspect of the economy, ranging from consumer spending to investment cycle and government policies. It is important for investors to understand the impact of inflation and look for ways to reduce its effect.
The retail inflation rate in India, which is measured by the Consumer Price Index (CPI), was 6.07 per cent in February 2022, as per data released by the National Statistical Office (NSO).
Here are two ways in which you can beat inflation through investments:
Equity: Equity investments involve a fair value of risk but also compensate well for the same. The average compounded annual growth rate (CAGR) on equity investments is 10-12 per cent. In contrast, most fixed deposits yield 4-6 per cent. Therefore, for long-term financial goals, equity investments are a must-have in order to beat inflation. One must, however, keep in mind that investments should be based on the investor’s risk appetite and overall asset allocation. For short-term goals, however, equity may not be suitable given the high levels of volatility.
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Gold: Much like commodities, gold is a traditional hedge against inflation as the yellow metal is considered a safe haven. It protects the value of your portfolio in times of rising inflation. Assets such as gold hold an intrinsic value, which gets enhanced due to their limited supply. Gold is also presumed to retain value in comparison to other asset classes such as bonds during rising prices. The precious metal helps diversify the portfolio and therefore leads to better risk-adjusted returns overall. It has a liquid asset and has no credit risk.
