As the retail inflation for the month of May increased to 6.3% from 4.23% in April, most people have started feeling the squeeze on their investments. The rise in retail inflation, measured by the Consumer Price Index (CPI), was mainly on account of a jump in food inflation. A rise in inflation reduces the purchasing power, the ability to buy goods and services. Put simply, rising inflation pushes the cost of living but the return on investment doesn't go up accordingly. Given this fluid situation, what should you do to manage your investments?
Here are some investment tools to keep you ahead of inflation:
In general, returns on stocks beat inflation. Consider this, rising prices of goods can mean more profit for companies. Better prices in turn boost share prices. However, there may be instances when it may not be true but over the long term, the stock market has historically provided returns that beat inflation.
2. Equity Mutual Funds
For many investors, monitoring the movement of individual stocks or the market on a daily basis is a task. They can invest in equity mutual funds after choosing a fund that appears to be best suited to fulfil their individual requirements and expectations.
The 5- and 10-year returns of most equity funds have remained usually above 10%.
Traditionally, Indians have invested in gold as this did not require them to be market savvy. People consider gold a safe bet against the periodic volatility of stock markets. It is considered a great hedge against inflation because the increase in its prices and the returns thereof have been able to offset inflation. Usually, when inflation rises the demand for gold increases.
The returns from real estate investments have managed to remain above inflation rates in India, but they require a huge capital, running into a couple of lakhs or crores. In most cases, investors need to account for the interest they pay on loans they take for buying a property. Since the value of real estate depends highly on the geography of the area, it often yields a better return to beat inflation.
There are some tangible assets that grow in value as they age such as vintage cars and fine art. Investing in these assets can work as a hedge against inflation. It is expected that the prices of these collectibles will appreciate over time and provide returns that are greater than the inflation rate. Investing in cryptocurrencies may also protect against inflation because there is a cap on their supply. But they are highly volatile and there's a trust issue with them.