Every investor faces an array of challenges in managing his/her portfolio. The prominent ones being choosing the right mix of assets in the right proportion to ensure the portfolio is on track to achieve different investment goals, both short-term as well as long-term. Also, this portfolio needs to beat inflation consistently to earn a positive real rate of return. If any of these are ignored, the investment process can get derailed. However, it is skyrocketing inflation that can cause the maximum damage to the value of one’s portfolio year after year.
Therefore, make sure you don’t ignore the threat of inflation while investing. Once you recognize the importance of defeating this evil called inflation, all your dreams can become a reality. Needless to say, winning over this dangerous evil is not an easy task. However, if you plan your investment, invest in instruments having the potential to beat inflation. If you are willing to make a few sacrifices today to have a better tomorrow, it can be defeated. Remember, achieving this victory would require years of patience, planning and discipline.
Although inflation is a bigger risk for long-term investment goals, it is equally important to keep an eye on rising inflation, even during the short term. A situation like now, where inflation is at a much higher level than its long-term average, requires one to prep one’s short term portfolio for a prolonged period of higher inflation. Though beating inflation during the short term can be quite a difficult task, one can certainly take steps to minimize the damage.
An important aspect of a high inflationary environment is that although it can have a damaging impact on your wealth, investments remain attractive if you invest wisely. For example, if you are one of those who park a large sum of money in bank savings account, investing in potentially better and more tax efficient options such as ultra-short term and short term debt funds of mutual funds can be a much better option. Currently, ultra-short term debt funds are yielding an annualised return of 7.5 per cent as against four per cent by savings bank account. Fixed Maturity Plans can also be a great option if you are quite sure about your investment time horizon. Similarly, if you intend to invest in equities for the long-term, the depressed state of the stock market during high inflationary periods provides a good opportunity to invest at attractive levels.
Here is what you need to do to tackle inflation on a consistent basis:
Plan your investments: Although it can be quite a challenge to develop a strategy that not only withstands the turmoil in different markets but also helps achieve short term and long term investment objectives, you can achieve the desired results by focusing on the correct asset allocation. Another important step that needs to be taken is to curb your expenditures by budgeting them. By doing so, more money will be available for investments every month.
Invest in equities: While commodities like gold provide an excellent hedge against inflation, one has to aim to beat inflation over the years. An asset class having the potential to beat inflation over the longer term is equities. However, investing in equities would mean taking a higher risk compared to some of the instruments that give pre-determined or stable returns. Thankfully, there are strategies like “systematic investing” that can help you in tackling the risk of volatility to a large extent.
Tax efficiency is the key to beat inflation: Considering that inflation eats into a substantial part of returns over the years, tax efficiency of the investment options plays a crucial role in improving the real rate of return in the long run. It becomes even more important when one plans to achieve medium to long-term investment objectives like children’s education, buying a house and retirement planning.
The author is CEO, Wiseinvest Advisors. Views expressed are personal.
