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7/29/2008

Beat the Soaring Inflation

Source:Economic Times

Liquid assets with low returns restrict the performance of a portfolio.

So, try to exit from such investments and redeploy the amount in asset classes that generate better inflation-adjusted returns.

For example, bank fixed deposits, post office recurring deposits, etc.


Add the Shimmer of Gold to Your Portfolio


Historically gold has proved to be the perfect hedge against inflation. After adding gold in your portfolio, the risk remaining the same, the overall inflation-adjusted returns of portfolio can be enhanced.

High inflation, in fact, puts an upward pressure on the interest rates, which in turn create uncertainty in the capital markets.

During such times of crisis, gold as an investment avenue is a good bet. Investment in gold can be made in the form of bullion, coins, jewellery and Gold Funds Exchange Traded Gold Funds, among others.


Check The Real Return On Investment Portfolio


Inflation eats into your net worth by reducing the real return on your investment portfolio. Real returns are inflation adjusted returns.

For example, if you have a bank FD, which earns returns at 8 per cent p.a., and inflation is 8 per cent, then the real return on this investment is zero.

Therefore, you should review your existing portfolio as well as make fresh investments to check whether your absolute returns are beating the rate of inflation by a good margin or not. Equity, commodities, gold and real estate are good investment options to generate a positive real rate of return.

For short-term requirements, you can consider investing in the short-term funds or floater funds. It is generally seen that a high inflationary trend is followed by an upward revision in the interest rates. Hike in the interest rates will adversely affect your long-term debt portfolio. Therefore, during inflationary periods, it is wise to invest in short-term funds and wait to reap high returns


Don't Let Your Money Lie Idle, Invest It Wisely

keep only 2-3 times of your monthly household expenses in the liquid form and invest the balance amount regularly in a well-diversified portfolio of equity, short-term debt, real estate, commodities and gold.

It will increase your cash inflows and help you reduce the burden of rising prices.


Stay Invested in Equities

For long-term investment goals like child education, retirement etc, equity can generate handsome inflation-adjusted returns.

Therefore, In spite of the current volatile situation in the equity market, it is advisable to stay invested as this is a cyclical event and in the long run the markets are bound to rise.

Hence, to achieve such goals one should be able to take a calculated risk.

"Consider this bearish trend as a good entry point in garnering blue chip stocks," says Kapur.


Diversify Your Portfolio

Inflation impacts different sectors in different ways. "Due to current inflationary trends, one needs to have a well thought-out sector spread in his investment portfolio. While investing in companies, one should look at how they are being impacted by the rising input and borrowing costs," informs Ashish Kapur, CEO, Invest Shoppe India Ltd.

For example, manufacturing companies or heavy industries, though their stocks, will be available at tempting valuations. However, chances are high that they will further fall in short term, owing to negative sentiment.

Hence, investments should be made in large cap companies having economies of scale and their ability to handle input and borrowing costs.


Review Your Financial Goals and Portfolio

In the current scenario of staggering prices, there is a need to review your financial plans and investments as the expenses and corpus required to achieve financial goals may increase.

So, you need to balance your portfolio so that it can generate better inflation-adjusted returns.


Insulate Your Long-Term Goals Against Inflation

Do not let inflation affect your long-term mandatory goals like house purchase, education and marriage of your children and regular income for the retirement years.

"With the help of a qualified financial planner, incorporate the inflation factor in your long-term goals and invest the required amount regularly towards meeting those goals," says Dalal.

For example, if you want to make provision of Rs 10 lakh for your 6-year-old daughter's higher education when she is 18, incorporating an inflation figure of 6 per cent p.a. will give you a figure of Rs 20 lakh at that point of time.

Therefore, you should start an investment plan from now, which will help you accumulate Rs 20 lakh after 12 years.


Rework Your Household Budget

In the times of rising prices, you need to spend your monthly household budget smartly. To maintain your lifestyle, you should limit the household expenses to 70 per cent of your monthly take-home income. "If it is exceeding the limit, you need to judiciously cut down on the unnecessary expense items," says Ramesh Dalal, V-P, Bajaj Capital Financial Planning Group.

For example, you should buy the seasonal fruits and vegetables and avoid the non-seasonal ones, as they are expensive. Control the use of electricity and telephone and try to reduce the expenses on wardrobe, partying, gifts etc. by a certain percentage.

You may also think of enhancing your earning capacity by changing to a better-paying job or doing some part-time work.


Tips to beat the soaring inflation


Inflation reduces your purchasing power, erodes your net worth and adversely affects your lifestyle in the long run.

Sadly, however, there seems to be no respite from this soaring inflation in sight, at least in the near future. Economists have already warned that inflation is bound to cross a 13-year high of 9 per cent from the current level of around 8 per cent, as a fallout of Wednesday's sharp hike in petrol and diesel prices.

Still you need to look out for some ways to keep your household budget intact. Here are some tips to shield you from this devil..

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