It’s a double whammy: The rising inflation has not only increased your food bill, but also reduced your real returns from investments.
The numbers aren’t pretty. For the week-ended January 1, food inflation stood at 16.9 per cent — slightly lower than the 11-month high of 18.3 per cent the week before. The consumer price index — a meter to measure the price of goods and services — stood at 8.3 per cent in November. It is expected to be higher in December.
In other words, an investor will have to earn at least 9-10 per cent annually to get positive returns. Here are some options and investment strategies that you should be following:
Direct stocks
It is an ideal option, but comes with risks. Consequently, the strategy has to be to buy-and-hold for at least 5-10 years.
Mark Matthews, strategist at Macquarie Capital Securities, says investors should look at blue-chip value buys. For example, the Nifty is up 100 per cent in the last two years, but Reliance Industries is only up 50 per cent. It will benefit from rising refining margins and cotton prices.
Others such as G Chokkalingam, executive director and chief investment officer, Centrum Wealth Management, feels another strategy could be to pick up stocks with zero debt on their books. “Stocks such as Hindustan Zinc would remain unaffected by the rise in interest costs, and may also benefit from the spiralling commodity prices.”
Tenure: Long term (five years or more)
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Tax: 15 per cent for the short term (less than a year), zero after one year
Diversified equity fund
Investors should avoid putting all their eggs in one basket. Hence, building a diversified portfolio or buying an equity-diversified fund will help investors do well over time. But again, one needs to give these time to perform. Importantly, use both lump sum and systematic investment plan (SIP) methods to invest.
Both work at different times. If one had invested a lump sum in January 2008, they would be still recovering their principal. On the other hand, a lump sum investment in March 2009 would have doubled their returns.
The safer way is, of course, SIP. But keep the discipline to continue investments even when the markets are falling.
There are other options such as index funds — these track the underlying indices and sector funds. Index funds are the cheapest way of investing in the market, and still get the flavour of a blue-chip fund. Sector funds are limited in nature because of their focus on a particular industry.
One should have all three in their portfolio. Exposure to sector funds should be limited and churning has to be done more often.
Tenure: Medium to long term (three-five years)
Tax: 15 per cent for the short term (less than a year), zero after one year
Precious metals
Gold and silver have been a classic hedge against inflation. Commodity experts feel these could be a good way to park your funds as well. But these are cyclic in nature.
Sumeet Bagadia, assistant vice-president (commodities and currency), CD Equisearch, says, “Based on the economic conditions, the outlook for the next two-three years is that gold is likely to remain strong. Even silver may continue to outperform for some time on the back of strong industrial demand.” Historically, gold and silver have returned 15-20 per cent annually.
One way of investing in gold is via exchange-traded funds (ETFs) because the amount required for trading is as low as Rs 1,000. Other options are to purchase from the physical market, and/or trading in futures through commodity exchanges.
Wealth managers recommend that investors put at least a minimum 5-10 per cent of their total portfolio investment in gold and silver.
Tenure: Short-medium term (one-three years)
Tax: In case of physical gold, short-term capital gains (less than three years) are added to the income and taxed, according to the slab applicable. Over three years, the same is 20 per cent after indexation. In case of ETFs, capital gains are added to income and taxed, according to slab. Over one year, the same is 20 per cent after indexation.
Debt options
Bank fixed deposits are not the best option in these troubled times. But these are the safest. The recent spurt in the fixed deposit rates has ensured that investors can earn eight per cent and more for one year. But once taxation comes into play, the real returns turn negative.
But options such as fixed maturity plans (FMPs), which are riskier in nature, or corporate deposits can give higher returns.
Experts feel one should not go overboard with debt options in the present times and invest only for a year or slightly more, in case of an FMP. Reason: Over a long period, the returns may not beat inflation.
Tenure: Short-term, six months to one year
Tax: 10 per cent for the short term (less than a year) without indexation, or 20 per cent with indexation.