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From gold to equity MFs, where should you invest when inflation is high?

Here are some investment options that can help you earn attractive returns despite high inflation.

Where should you invest when inflation is high?
Ultra short-term debt funds and liquid funds are comparatively resilient against rate hikes, and in fact start to provide better returns.

Investment is critical to the achievement of life goals such as wealth creation. But inflation is the enemy of returns. Inflation erodes the value of money. To give you a simple example, if the return on your investment is 6% pa, and the prevailing inflation rate is 5%, your real rate of return would be only 1%. So, if you ignore the inflation, you may fall short of your goals despite all your efforts.

Currently, the Indian economy is experiencing high inflation. High inflation periods cause faster erosion of value. But you can soften the blow of inflation by picking investments that do well during inflationary periods. Here are some investment options that can help you earn attractive returns despite high inflation.

Invest in Gold

Gold is a hedge against inflation. When inflation is high, gold can provide better returns. Gold returns may not consistently beat inflation but merely track the inflation rate. Gold prices tend to flatline during calm periods and become volatile during periods of uncertainty for reasons such as inflation or war. It is a good long-term investment option. You have the option to invest in physical gold, gold ETFs, and Sovereign Gold Bond (SGB). SGB provides the added benefit of tax-free returns on maturity and an additional interest return of around 2.5% pa. 

Equity Mutual Funds And Stocks 

Investment in equity mutual funds and direct stocks quickly adjusts with the change in the market scenario. Higher inflation results in higher market volatility in the short term; however, it opens up a huge opportunity for investors in the long term. While investing in equity funds or stocks, you can consider the SIP approach for rupee cost averaging and lower risks. Diversify your portfolio adequately while investing in equity.  

While investing in equity, allocate funds in sync with your risk appetite and return requirement. Avoid overexposure while allocating funds to equity investment. Equity investments are considered best for the long term. But if you are new to equity, go with mutual funds instead of direct investment.

Consider Investing In REITs

These days, you can invest in both physical and digital gold. Similarly, you can buy either physical real estate or digital real estate like Real Estate Investment Trusts (REITs). When there is high inflation, input costs such as construction materials prices usually increase, and the bank’s lending rate also goes up. It results in a hike in realty prices, and the rent also goes up. So, investing in real estate can be a good option when inflation is high. It requires a big amount to invest in physical real estate. However, with REITs, you can even begin with a small investment.

REITs work quite similar to mutual funds since your investments are unitised. But your units are only in income-generating properties. Before investing in REITs, you must analyse their portfolio and business model quality. You can invest in the REITs in sync with your long-term goals.

Allocate Some Amount In A Short-term Debt Fund

There are higher chances of interest rate hikes due to inflationary headwinds. Rising rates negatively impact the return potential of long-term debt funds. However, ultra short-term debt funds and liquid funds are comparatively resilient against rate hikes, and in fact start to provide better returns. You can park your corpus in short/ultra-short term debt funds when the inflation is high.

When inflation is beyond expected levels, the investment scenario changes significantly. So, you must review and readjust your investment portfolio in sync with the change in your risk appetite and return expectations according to your financial goals.

(The author is CEO, Bankbazaar.com)

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