Inflation reduces the purchasing power of money. Check out this post to learn how to use investments to prevent high inflation from affecting your savings. The central banks across the world pumped large sums of money into the economy to minimize the slowdown caused by the COVID-19 pandemic. But while the worst phase of the pandemic is fortunately behind us, the after-effects could have vast implications. For instance, inflation is a major concern in several countries like the USA and UK. But closer home, things seem to be much better, with the October 2022 CPI (Consumer Price Index) at a 3-month low of 6.77%, according to data released by the Ministry of Statistics & Programme Implementation (MoSPI) in November 2022. However, even though the retail inflation in India is in line with the RBI's target range, it is a topic that cannot be left unattended. After all, inflation reduces your purchasing power by making everything more expensive. So, if you're looking for the best way to beat inflation, a well-thought investment strategy could help.
What Does It Mean to ‘Beat Inflation’?
Beating inflation means investing your money to generate returns higher than the prevailing inflation rate. For instance, if your investment of Rs. 1 lakh generates an annual return of 5%, you’ll have Rs. 1,05,000 at the end of the year. But if the inflation rate is 6.5%, the returns you’re generating are below the rate at which money is losing its purchasing power.
What are the Different Ways to Beat Inflation in India?
So, how to beat inflation in India? The most effective solution is to invest your savings in assets, securities, or products that could deliver returns similar to or higher than the inflation rate. Fortunately, there are several investment options in India to suit every type of investor. Let’s take a look at some of the most popular options-
How to Beat Inflation?
Before you go further, note that there is no guaranteed way to beat inflation. Even fixed-return instruments like fixed deposits do not guarantee inflation-beating returns. This is because the inflation rate and the ROI (Return on Investment) on your investment will decide whether you’ve successfully beaten inflation with your returns. In fact, fixed-return instruments are not usually used to generate inflation-beating returns. Moreover, remember the thumb rule of investments - the higher the return potential, the higher the risks associated with it.
Having said that, a few investment options are popular for possibly generating inflation-beating returns.
1. Invest in Gold
Gold is a traditionally popular investment option in India with a lot of cultural and sentimental value. It is often considered a safer bet against the cyclical and volatile movements of the stock market. Moreover, gold investments have also beaten the average inflation rate in most years. In fact, since India's independence in 1947, the gold value has zoomed by more than 60,000%, from Rs. 88.62 per 10 grams to around Rs. 55,000 per 10 grams, as per a report on Live Mint dated 14th August 2022. Here are the different ways to invest in gold-
Physical Gold- You can purchase gold coins, bars, or jewellery.
Gold ETFs- These are open-ended mutual funds that offer exposure to gold without the high making charges and security concerns of physical gold.
Sovereign Gold Bonds (SGBs)- SGBs are RBI-issued government securities denominated in grams of gold. Like gold ETFs, SGBs are also an excellent alternative to physical gold.
2.Equity Investments
Equity has long been known as one of the most rewarding asset classes for long-term investments. BSE Sensex, the oldest stock exchange in India, has delivered a healthy return since its inception. However, the higher returns potential also comes with a higher level of risk. If you’d like to invest in equities, you can consider-
Direct Stock Investments- It requires investors to analyse stocks and make investments on their own through a trading/Demat account.
Equity Mutual Funds- Schemes pool money from investors and build an equity portfolio according to the scheme’s objectives. Equity funds eliminate the need for investors to analyse stocks and invest on their own - a task that requires extensive knowledge and experience.
3.Debt Investments
The debt market is usually interrelated to the interest rates in the country, which is often closely related to the inflation rate. So, if you’re a low-risk or risk-averse investor, building a diversified portfolio with more exposure to debt-based assets can possibly help you beat inflation. For debt investments, you can consider- Inflation-Indexed Bonds- Issued by the RBI, these bonds have a flexible principal amount adjusted according to the inflation rate. Investors receive interest income on the adjusted principal. Debt Mutual Funds- There are 16 different types of debt mutual funds with maturities ranging from 1 day to several years. You can choose any debt fund as per your investment objective and horizon.
Importance of Rebalancing Your Portfolio
Whether your goal is to beat inflation or achieve long-term financial goals, it is essential to rebalance your investment portfolio regularly as per the market conditions. Several factors change with time, like inflation, risk appetite, and financial objectives. Thus, investors should make timely adjustments so that the investments align with the updated conditions.
Beat Inflation with Investments to Retain the Purchasing Power
Money loses its value or purchasing power due to inflation. However, investments in assets or securities like the ones listed above may help you outperform inflation and generate higher returns. Before investing, thoroughly understand your objectives, risk appetite, and investment horizon, as they can vary significantly between individuals. Moreover, if you’re new to investments, you can always consult an investment advisor for building and managing an investment portfolio.
The past performance of any mutual fund does not guarantee similar results in the future.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
As an enthusiast with a demonstrable understanding of finance and investment strategies, I can confidently address the concepts presented in the article about beating inflation through investments. My knowledge extends across various financial instruments, market dynamics, and economic indicators, allowing me to provide insightful information on the topic.
The article rightly emphasizes the impact of inflation on the purchasing power of money, especially in the context of the post-COVID-19 economic recovery. The injection of large sums of money into the economy by central banks worldwide to counter the pandemic's effects has heightened concerns about inflation in countries like the USA and UK.
The Consumer Price Index (CPI) is highlighted as a key measure of inflation, with specific reference to India's October 2022 CPI at a 3-month low of 6.77%, according to data released by the Ministry of Statistics & Programme Implementation (MoSPI) in November 2022. This indicates the importance of staying informed about relevant economic indicators to make informed investment decisions.
The article goes on to explain the concept of beating inflation through investments, emphasizing the need for returns that outpace the prevailing inflation rate. It correctly notes that fixed-return instruments, like fixed deposits, may not guarantee inflation-beating returns, as the success of beating inflation depends on the relative rates of return and inflation.
The investment options recommended in the article include:
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Investing in Gold: The article provides a comprehensive overview of gold as a traditional and culturally significant investment in India. It explores various ways to invest in gold, including physical gold (coins, bars, or jewelry), Gold ETFs, and Sovereign Gold Bonds (SGBs). The historical perspective on gold's value appreciation since India's independence adds credibility to the recommendation.
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Equity Investments: The article rightly recognizes equity as a rewarding asset class for long-term investments, citing the BSE Sensex's historical performance. It distinguishes between direct stock investments and equity mutual funds, highlighting the latter's advantage for investors who prefer professional management and don't want to analyze stocks themselves.
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Debt Investments: The debt market's relationship with interest rates and its correlation with inflation are explained. The article recommends debt-based assets for low-risk or risk-averse investors and mentions specific options like Inflation-Indexed Bonds and Debt Mutual Funds.
The importance of portfolio rebalancing is appropriately stressed, acknowledging the dynamic nature of market conditions, risk appetite, and financial objectives. The article concludes with a reminder that investments in assets or securities can help retain purchasing power despite inflation.
In summary, the article provides a well-rounded overview of the impact of inflation, the concept of beating inflation through investments, and specific investment options tailored to the Indian context.
