As inflation trends up after a brief pause, investors not only need to take adequate steps to protect financial assets, but also need to be careful about future investments and review their existing investments periodically. Sticky inflation reduces one's purchasing power, dragging the value of one's savings over the long run.
The best way to deal with inflation is to choose an investment portfolio that helps to counter inflation and generates higher returns. One must look at allocating funds in equity, debt, gold and real estate to generate higher long-term returns.
When prices in the system are on an upward spiral due to persistent demand, the RBI aims to reduce demand in the economy by raising the cost of money. A recent note from Citibank says that while the overwhelming election mandate has energised equity and currency markets, the fears of elevated inflation/higher borrowing have resulted in the rates market remaining lacklustre. The bank is of the view that CPI will average 8% in FY14 and 6.5% in FY16.
In fact, hailstorms in March had driven up food prices and pushed CPI to 8.6% in April. More worrying was food price inflation, which rose to 9.8% in April from 9.2% in March. Core inflation remained steady at 7.9% year-on-year. The inflationary impact can still be countered if the government takes adequate measures, such as large-scale disbursement of grains from stocks, addressing supply-side bottlenecks and cracking down on hoarders.
The real dampener is the IMD's prediction that rainfall will be 5% below- normal this year. The department sees a 60% probability of sea temperatures reaching the El Nino threshold, which is associated with lower rains. If monsoon is 5% below normal, food output will be hit, which will affect the overall macro economy.
Previously, weak rains (10-15% below normal) have resulted in lower foodgrain output growth, zero-to-negative agriculture GDP growth and higher food price inflation.
Rising inflation can create havoc in your financial life, be it day-to-day expenses, retirement planning, childrenís education, their marriage, vacation or medical expenses. In a rising inflation scenario, it makes sense for the retail investor to do some portfolio rebalancing.
Also, one needs to invest regularly. Hunt for higher fixed deposit rates offered by banks to park long-term funds. Take the mutual fund route to invest short- and medium-term funds after evaluating the fund's performance and charges. Inflation-indexed bonds offered by the government are also a good option as they protect