6 Ways To Beat Inflation With Investments

Inflation refers to a measure of increase in the price level of goods and services. Sounds familiar? But how do you escape from the perils of inflation?

Inflation implies a reduction in the real value of money which means the purchasing power of an individual reduces. To keep up with the inflation, one must possess more than one source of income. 

Various long term investment options are available that help combat inflation. There are other options like public provident fund, bank deposits, certificate of deposits and other short term investments that are a good place to invest in, but they do not provide returns high enough to fight inflation.

Now let’s look into a few long term investment options that make up for inflation

Long term investment options to beat inflation: 

Now let’s look into a few long term investment options that make up for inflation

Inflation indexed bonds

Inflation-indexed bonds are one of the safest and most effective options to provide a hedge against inflation. Inflation-indexed bonds are one of the many types of bonds that the government issues through RBI. A unique feature of this bond is that it adjusts its principal amount to the changes in inflation, and the interest is paid on the adjusted principal.

The calculation is slightly complex, but let’s take an example to understand it in simple words. Consider the inflation rate at the end of the year as 10%. You hold a Rs. 100 bond that would yield an interest of 8% p.a. In a normal bond, interest at the end of the year would amount to Rs.8, but in case of an inflation-indexed bond, the principal would get adjusted to the inflation, meaning, it would now become Rs.110 and 8% would be paid on this; Rs. 8.8.

Mutual funds

Another avenue gaining a lot of importance in recent days is mutual funds. And for the right reasons. If you have just started earning or do not have a steady income source yet, mutual funds are the one for you.

Here, an amount as low as Rs.500 can be invested in a systematic investment plan (SIP). A fund manager, who is a financial expert, would pool funds from you and similar investors and create a fund based on your risk and return preferences. He manages this fund and provides you the returns.

An equity linked savings scheme (ELSS) is one very beneficial scheme offered by mutual funds in India. Though there is a lock-in period of 3 years, this scheme offers tax-free savings.

Stock market

The stock market is another very good investment avenue if you’re looking for long term returns. Though there is a high risk associated with the shares traded in the stock market, it is compensated with the high returns that these investments yield. 

In the Indian stock market, incidents like the 1992 Harshad Mehta scam developed a mistrust of stock markets in the people. But increased regulations of SEBI and relative stability of the exchanges are restoring the confidence among investors. Impulsive buying and selling does not always prove to be advantageous. It is very crucial for one to have the knowledge of how these stocks work, and of course, experience is the best teacher!  

Real estate

If you have a huge surplus to invest, real estate is one very good option to consider. It is one of the most trusted investment options by the Indian masses, especially the baby boomers and generation X.

Real estate is the most illiquid investment option, which means it cannot be sold for immediate requirements of cash. To defeat this drawback, there is an alternative known as Real Estate Investment Trust.

In India, the first guidelines for REIT were issued in 2007 by SEBI. REIT is basically a company that owns and operates income-generating real estate. The shares of REIT are publicly traded on the stock exchanges. So buying these shares would mean indirectly investing in real estate.

Gold

Gold is another investment option that the Indian population trusts. There is a huge demand for this scarce metal in India. This increased demand not being fulfilled by the low supply results in increased prices. Though there have been slight fluctuations, the past 2 decades have witnessed a steady rise in the prices.

Investment in gold can be done through physical gold, gold bonds, gold exchange traded funds, digital gold, gold savings scheme and few others. Though gold investments incur additional costs, do not provide a constant cash flow, and also capital gains tax is imposed, it is a good way to diversify the portfolio. 

Debt funds

Debt funds like debentures and government bonds are also a good option to consider. The risk involved is relatively low. These are highly liquid investments, and also, the interest provided by these instruments is fixed. The interest rate is fixed considering the inflation changes. Therefore, it is a good option to beat inflation. They come in various forms. An investor is free to choose the most feasible one. 

Final words

One important thing an investor must consider is that investment is not simple as it seems. Before investing, you must be well aware of the various alternatives available to you & how those alternatives work. Warren Buffet says, “risk comes from not knowing what you are doing”. An informed investor always has a lower risk of losing his money. 

Another important thing an investor needs to consider before parking the surplus funds is diversification. There’s a very famous saying- “Don’t put all your eggs in a basket”. It means that the portfolio must be diversified. But many fail to understand that diversification in this context means choosing and investing in avenues with a wide range of risk and returns. This helps the investor earn maximum returns.

stay informed and invest wisely