Investing for Inflationary Times

Inflation is shadow looming large over the world economy. It has caused a drastic spike in the price of products and services, including oil, vegetables, clothing, healthcare, transport and communication, etc. Therefore, it is fair to say that inflation is clearly affecting our way and cost of living.

Therefore, when planning our household budgets, we need to accommodate for this unpleasant guest. However, that only negates the present effects of inflation. To handle inflation in the future, we need to tweak our savings and investments plans as well.

How to invest during times of high inflation, you ask?

Here are some tips that can help you counter the negative impact of inflation and don’t necessarily mean spending more money on investments, though that never hurts.

Real Returns Matter

Real returns are what you have in your hand after factoring in the rate of inflation. For instance, if your investments deliver 5% returns and inflation is at 4%, your real return is 1%. In other words, your money's purchasing power grew by only 1%.

On the other hand, if the inflation were at 6%, your real return would be -1%. That means your money suffered a 1% loss in its purchasing power. Real returns are also known as inflation-adjusted returns.

Not many people look at real returns when investing money. Most Indians invest solely in Fixed Deposits, which is not exactly the ideal inflation investment. As per RBI's data, the total amount invested in Fixed Deposits stood at Rs.142 lakh crore as of 11th February 2022, nearly 3.6 times the AUM of the entire Mutual Fund industry.

While it is ok to seek safety in our investments, many of us forget that we are subjecting ourselves to a loss of purchasing power when we over-allocate monies to FDs. Therefore, it is crucial to look beyond Fixed Deposits and seek more lucrative investments during inflation-laden times.

Equities for Beating Inflation

If we go by historical data over the past 2 or 3 decades, equities have not just delivered positive real returns but have also outshined other asset classes, including debt and gold. This makes them one of the best investments for inflationary times.

Equities could be risky in short term. We have seen in many instances in the past and the recent fall in stock prices is no different. But in the long run, the risk in equities reduces and could be mitigated too. Here are three healthy ways to go about equity investing:

  • Assess your risk profile with the help of an expert to understand how much equity exposure you can take

  • Diversify your investment portfolio with a good balance of debt and equity investments.

  • Investing in SIPs is always a good idea. They ensure disciplined investing, while also allowing you to benefit from rupee cost averaging.

Add a Little Glitter to Your Portfolio

Gold has long been considered a hedge against inflation. It has traditionally acted as a store of wealth and protected the purchasing power of most Indian families. Since gold is priced in US dollars and converted to rupee when we buy or sell gold in India, it directly provides a hedge against possible depreciation in rupee.

Gold as an investment is highly liquid and could be converted to cash easily. Further, gold has also countered the volatility in other asset classes like equities on several occasions. Gold’s rally during the Covid-19 pandemic and the recent jump in prices amid the Russia-Ukraine crisis reiterate the point.

So, you may consider adding some glitter to your portfolio by investing in Gold ETF or a Gold Fund of Funds. They can serve as an ideal investment during inflation-heavy times.

Preparing for Your Future

Inflationary times could be painful when we make our monthly budget but being prepared helps. With the right investments, not only can you keep pace with the inflation but you can outright beat it over a period of time. You can start investing in Mutual Funds through Investment Services Account with HDFC Bank , which can go a long way towards helping you make investments at the right time. Just login through your NetBanking, go to the Mutual Funds options, click on request, and open Mutual Funds ISA Account.

Click here to open your ISA today! 

Read more on here on why it’s time to start tax planning for 2022-23

​​​​​​​*Terms and conditions apply. HDFC Bank is not indicating or guaranteeing returns on any investments. Readers should seek professional advice before taking any investment related decisions. HDFC Bank is an AMFI registered Mutual Fund distributor. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.