People investing in fixed-return instruments continue to lose purchasing power of the capital invested with the interest rates considerably lagging the rate of inflation.
To beat inflation, investors have to take some risk.
Post the onset of the Covid-19 pandemic, the economy, markets and livelihood all were hit hard after the economic activities got almost stalled due the nationwide lockdown that was imposed from the last week of March 2020 to contain the spread of the highly contagious virus.
With the active Covid-19 cases dropping remarkably at the end of the year 2020, economic activities rebounded pushing the stock markets up in the first two months of 2021 to all-time high levels.
However, the rate of inflation remained high for the major part of 2020, aggravating the miseries of people struggling after job loss or salary cuts. But the key policy rates were kept low by the Reserve Bank of India (RBI) to give priority to economic development rather than controlling inflation.
As a result, people investing in fixed-return instruments continue to lose purchasing power of the capital invested with the interest rates considerably lagging the rate of inflation, generating a negative real rate of return for such investors.
“The Indian economy has shown green shoots of revival in the last two to three quarters prior to the blow out of this second wave of Covid. With the momentum developed, we believe that India could be on its way towards normalisation. It implies that fixed-income investors must now look forward to enhancing their portfolio yields by adding some credit, especially as AAA corporate yields and sovereign bonds rarely beat inflation,” said Nitin Rao, CEO, InCred Wealth.
So, what should the investors do now to earn a better return?
Choose tax efficient products
“Investors can turn towards specific issuers as per their preference and lend with a horizon of 2 to 3 years. They must also maximise the tax efficiency with suitable product structures,” said Rao.
Invest in equities for long term
However, to beat inflation, investors have to take some risk and invest in equities for the long term.
“In terms of equity, a steep rise has been seen following last year’s corrections. An imminent drift is expected in the mid-cap and small-cap sector and that is where the bias should be with a long-term investment perspective,” said Rao.
“I feel that going forth the price will follow earnings as we will observe normalisation in the market. Sectors such as financial, healthcare, and FMCG alongside others have certain opportunities that can be utilised. They have strong chances of outperforming broader markets and can be tapped via specific products such as Mutual Funds and PMS,” he further said.