As the ongoing trend of rising prices (inflation) continues, safeguarding your investments and finances becomes increasingly crucial. In this article, we will reveal some intelligent strategies to secure your money and make prudent investment decisions in the face of escalating prices.
The Context
The way to crush the middle class is to grind them between the millstones of taxation and inflation — Vladimir Lenin
To get things going, let’s look at a simple classic product. This is one of the top-selling pasta and noodles products in India. It comes from the stall of a major FMCG company and now holds a market share of over 60%.
A 100-gram pack of (Nestle) Maggie could be bought for just ₹2.50 rupees in the 1980s. Fast-forward 42 years and the identical pack will cost ₹14 for 70 grams in 2022. According to conventional standards, a 100-gram pack would now cost ₹20.
While the prices have gone up, the portion size of your favorite snack has also been compromised.
That is a shocking price increase of around 800% over the last four decades!
You must investigate the heightened impact of inflation on your most recent grocery purchase to support this statement. Let’s not even begin to discuss how inflation affects the cost of living, housing, fuel, and education. Inflation is a worldwide problem, to sum it up.
Don’t worry, we won’t confuse you with an explanation of complicated concepts like the Consumer Price Index (CPI) or Wholesale Price Index (WPI). Macroeconomics is a vast area of research and this article has been deliberately written with much simplicity.
What Is Inflation?
As outrageous as it may sound, corrosion and inflation can be contrasted.
One of the most well-known words in economics, perhaps. Countries have been plunged into protracted periods of instability by inflation. Many leaders have gained power by promising to fight inflation but have afterward lost it after failing to do so.
To clear up any confusion, inflation is just a general increase in prices. Your rupee (or other currency) isn’t as valuable as it once was. It’s not just one thing that costs more; a whole bunch of stuff does.
For example, eggs at the grocery store cost more, as do milk, bread, shampoo, rent, movie tickets, wine, clothing, and, well, you get the idea. The pace of price growth over a specific period is known as inflation.
Inflation is often measured in broad terms, such as the general rise in prices or the rise in a nation’s cost of living.
The forces that cannot be stopped
In the short term, high inflation can be the result of a heated economy. A heated economy outpours excess cash and entices corporations to make more profits.
✓ Excess Cash
This happens when people have a lot of surplus cash or are accessing a lot of credit (cheap money) and want to spend. If consumers are buying goods and services eagerly enough, businesses may need to raise prices because they lack adequate supply.
This is also known as Demand-Pull inflation.
✓ Profit Making
Because they can raise prices and increase profits without losing clients, businesses may decide to charge more. Another name for this is cost-push inflation.
Sometimes, inflation can also rise and fall based on developments that have little to do with economic conditions. For instance, limited oil production and expensive imports can make petrol and diesel expensive. Supply chain problems (for example, during COVID lockdowns) can keep goods in short supply, pushing up prices.
The intricacies can be deceiving
It’s a common belief that Inflation hurts consumers more than investors. However, upon further examination, you will realize that every investor also doubles up as a consumer in their day-to-day life.
Increased out-of-pocket costs will ultimately result in fewer funds available for your financial goals. In addition, inflation has an odd effect on your investment activities if it is disregarded.
Your fixed objectives become moving targets that appear to be becoming farther away as you draw closer as a result of inflation. Your income and investments must increase at the same time that prices do, to cover your daily needs for the consumption of goods and services.
That is if you need to keep up with your ambitions or preserve your current way of living.
Let’s examine how
Imagine that you are managing to save ₹10 lakh per annum to buy a house that costs about ₹1 Crore in today’s value. Simple arithmetic says; that at ₹10 lakh savings per annum, it will take you 10 years to save ₹1 Crore.
Now let’s examine how much your dream house would cost after 10 years, if you have saved ₹1 crore, assuming a conservative annual inflation rate of just 5%. If you pay close attention to the overhead display, your goal of one crore evolves into a shifting target that tends to move up as you make progress toward it.
Your modest goal will leave you stuck with a significant shortfall of roughly ₹60 lakh after ten years that you didn’t factor into your plan.
The countermeasures
High inflation scenarios sometimes help governments to pay off their debts. Higher prices mean higher GST collections.
The real value of Government bonds also appreciates during high inflation because of fixed interest rates and thus it’s easier to pay these bonds.
Nonetheless, the governments and the Reserve Bank of India are still doing their best to regulate and optimize inflation and every smart investor must also take steps to protect his/her personal interests.
Here are some strategies for battling inflation.
✓ Invest In Gold
Gold is a proven long-term hedge against inflation but its performance in the short term is less convincing. An investment in gold shifts the investor’s purchasing power from now to later.
Because gold’s price growth is typically greater than the rate of inflation, it mitigates the dangers associated with inflation. This is partly because gold is a physical commodity rather than a paper asset like a government bond.
✓ Invest In Growth Stocks
Some growth stocks have always been a reliable inflation hedge. Please keep in mind that not all growth stocks are acceptable as inflation hedges.
You need to be particular about picking some good companies that hold the pricing power during high inflation scenarios. The pricing power of a company simply means its ability to pass on the rising costs among consumers without forfeiting a substantial volume of customers or demand. For example FMCG, Energy & Utilities
When used with diverse portfolios, this method performs well. You can enroll in our classes to learn more about these industry plays.
✓ Invest In Foreign Currency
Inflation is primarily regulated by government policies. Controlled inflation helps a currency maintain its purchasing power even when the value of money depreciates under other regimes.
A currency that appreciates 8 percent during 6 percent inflation may be considered a relatively good inflation hedge.
✓ Invest In Real Estate
Real estate is perceived to be a hedge against the rise in the general level of prices of goods and services in an economy (inflation) over some time. Real estate hence presents a compelling opportunity for investors who are attempting to hedge their capital against inflation.
In addition to several long-term investment advantages, such as healthy income returns, the sector also offers important fundamentals like the enhancement of the risk/return factors of the total portfolio. It is to be noted though that your investment must generate a steady stream of cash flow.
Investing in Real estate for self-consumption defeats the purpose of beating inflation.
✓ Increase Your Cashflow
There are times when every effort to protect invested capital falls short, and in these situations, boosting personal cash flow becomes urgently necessary. To support your goals, increasing the cash flow involves earning or saving more money by inflation.
There are numerous ways to enhance cash flow during prolonged inflationary situations.
A few of them include –
☑ Upskilling yourself to boost income
☑ Reducing your spending
☑ Creating additional revenue streams; like starting a business
☑ Aggressively re-investing dividends from stock investments
☑ Refinancing your debt
☑ Planning for infrequent recurring expenses
You are advised to glance through our “How-To” article on this topic for more details.
Seek Higher-Interest Interest Rates
The interest rate is typically raised to combat high inflation. Therefore, it is your right and responsibility as an investor to constantly look for safe investments that yield high-interest rates during inflationary times.
If you wish to gain from the other side, cash and debt investments are excellent partners.
Historical evidence suggests that a diversified portfolio must have a fair chunk of debt investments. The debt portion of your portfolio works as a hedge against risky investments.
This final remedy to fight inflation refers to a plan that specifically calls for investing in high-yield, low-risk securities. Examples – Fixed deposits, Government Bonds, Treasury Bills, and stable Debt mutual funds.
Conclusion
Unavoidable factors like inflation tend to skew an investor’s plan. Your returns are deemed useless and meaningless if the increase in the cost of goods and services outpaces the returns you get from investments. The investment you choose must produce returns that are higher than the rate of inflation in the market if your objective is to make money.
Note- You are urged to speak with a licensed “fee-only” financial advisor in the event of any confusion.
The writings should not be taken as advice on making investments. This concludes our examination of this crucial issue that every investor should consider.
🔔Investing is expensive, but leaving comments on this blog is free! As prices keep going up, it’s really important to keep your investments and money safe. This article will show you smart ways to protect your money and make wise investment choices when prices are rising.
