Moderate growth and high inflation has been the bane of many investors. Moderate growth has led to slower rise in incomes. But inflation has caused problems on two fronts – one, you have lower purchasing power and second, there is lower propensity to save. These two need to be managed properly to avoid financial problems.
Inflation will continue to be high in India as there is more money in the hands of people, especially in the rural areas due to development as well as on account of the social schemes that are run by the Central and State Governments. Another cause of inflation is that General Elections are due in 2014, and the government may announce populist measures ahead of the elections. So, we may see higher inflation numbers in the future as well.
Amid this situation of moderate economic growth and stiff inflation, investors are often wondering as to which investment will effectively help in creating wealth after accounting for inflation.
While making fresh investments, or evaluating your existing investment portfolio in inflationary times, you need to be cognizant about the real rate of return compared to the nominal rate of return. Suppose your fixed deposit fetches you an interest rate of 9.5 per cent and the inflation is 7.5 per cent, then the real rate of return is only 2 per cent (9.50 per cent - 7.50 per cent). If you consider the tax element and if you are in the tax bracket of, say 30 per cent, then the return turns negative.
This is the typical case at present because of which your savings in fixed interest rate deposit are not giving any positive inflation adjusted returns. So what are we supposed to do in these circumstances?
So, where should you invest?
During inflationary times, if you have the appetite and the age to invest in riskier class, the following avenues can be considered :
Equities: Investment in stocks which do not have debt and have lot of cash surplus can be considered. These stocks are not affected by the increase in interest cost due to higher borrowing cost. For instance, TCS, Hindustan Unilever, Marico, Glaxo Pharma, and so on.
To invest in equity, you could either invest directly in equity stocks or invest through equity mutual funds. Both have their own benefits and limitations. If you as an investor have good knowledge about stocks and investing, with the requisite time and skill to analyse companies, then you can surely do your own stock-picking. But, in case you lack any one or all these pre-requisites, then you will be better-off investing in stocks through equity mutual funds, since they offer several important advantages over direct stock-picking. But while investing in mutual funds too, care should be taken to select winning mutual funds, and preferably choose diversified equity funds over sector or thematic funds.
All those investors who have invested over the long-term have generated wealth in equities, but what is required in prudence, patience and perseverance to beat the inflation bug.
A Systematic Investment Plan(SIP) can be a method of investing in Gold ETFs that is, invest a pre-determined amount of money in gold ETFs over a period of time. By investing through SIP you can benefit by way of rupee cost averaging as well as avoid the risk of buying high.
As can be seen the annualised return generated by Gold BEES is approximately 27 per cent over a two-year period, 10 per cent over a one-year period and 18 per cent over a six-month period.
Real estate: Real estate is another preferred avenue of investment as during inflationary times, property prices tend to escalate in line with the increase in cost of construction. The biggest constraint is that the minimum amount you need to invest here is substantial and beyond the reach of the common investor. The past trend in prices suggest that investment in real estate or property has been quite rewarding, and can be considered as an alternative investment in your overall investment portfolio. There is a huge potential in the infrastructure and realty space in India. Buying property is and will remain an important investment avenue for today and time to come. Cities like Mumbai have seen annually 10 to 15 per cent increase in property prices year on year. The rate of increase is higher in distant suburbs of Mumbai like Virar, Dombivli, Kalyan, and so on.
If one lets out the property on rent, good returns can be obtained, apart from capital appreciation over a period of time. However, while you invest in property, you must exercise caution and look into aspects such as property location, title, builder’s reputation, and so on.
While investing in real estate, one must also consider the liquidity aspect. Investments in equities and Gold ETFs are liquid, whereas in case of property liquidity may be a constraint on account of high value amount and transactional time.
During inflationary times, it is required that the value of money needs to be protected. By locking in investments that provide steady returns during inflationary times, you will be able to protect the value of your money. Thus to conclude, while there are investment avenues to beat the inflation, it is important that at all times investors’ ensure that their portfolios are well diversified, taking into account their needs and aspirations.
The writer is a freelancer.