As the Consumer Price Index (CPI)-based inflation inflation spiked to a five-month high of 7.41% in September, remaining above the Reserve Bank of India’s upper tolerance limit of 6% for the ninth straight month, individuals should look at creating an inflation-resilient portfolio and brace for more rate hikes. Rising services inflation is impacting urban areas more, which have a higher share in consumption of services.
While surging inflation impacts fixed income investments the most, individuals must do the right portfolio mix to hedge their investments against rising prices and protect the purchasing power. Moreover, they should look at diversification as it is the core of the asset-allocation and will cushion the portfolio against any adverse movements in a single asset class because of inflation. And most importantly, one must plan expenses, spend wisely and reduce liability.
Here’s how investors can realign their strategy now to protect their portfolio from inflation.
Do not ignore equities
Investing in equities will fetch inflation-beating returns in the long run. One can create an equity portfolio by investing in stocks of companies with strong fundamentals. Equity is a long-term investment and short-term gain does not deter matured investors to move their funds into other asset classes. While the long-term returns in equity have been upwards of 12% over the last 20 years, the returns from bank fixed deposits average around 5-7%. Rising interest rates on FDs will not be enough for equity investors to park money in FDs.
If an investor has an investment horizon of five to seven years, he should go for equity investment without any hesitation. Chaitali Dutta, founder, AZUKE Personal Finance Advisory, says with the compounding effect working on your investment, the level of Nifty at which you are entering does not matter. “Continue with the equity MFs, preferable via the SIP route, where you are averaging out the purchase price as well,” she says.
Invest in high-yielding fixed deposits
Investors should look at deposits of triple-A rated companies to earn 100-150 basis points higher interest rate than bank FDs. However, experts suggest targetting short tenures now as the interest rates are likely to rise further. While triple-A ratings will give you lower returns than the lower-rated deposits, your money will be safe here and you will get your principal and interest on time. Before investing, check the fundamentals of the company and the sector and calibrate your risk and return expectations.
Diversify your portfolio with multi-asset funds
These dynamically managed hybrid mutual funds can help investors to improve the risk-reward ratio as the fund managers book profits from the performing assets and reduce exposure to the underperforming ones. The fund’s allocation to equities, debt and gold will depend on the fund house’s views on the economy and growth potential of each asset class. These funds are dynamically managed based on the economy and growth potential across different asset classes, but it has a common portfolio for all investors. By investing in these funds, one can generate marginally higher returns than fixed income and can be an alternative to long-term fixed deposits (three years and above) for those ready to take some additional risk.
Also Read: Your queries: Mutual Funds – Stagger your investments in flexi cap funds via SIP/ STP
Investors must evaluate the impact of the allocation to multi-asset funds on their overall portfolio as the aim is to primarily benefit from the asset-allocation expertise of the fund manager concerned. Moreover, they should also assess how the fund’s allocation across various asset classes has moved across time and market cycles. Brijesh Damodaran, managing partner, BellWether Advisors LLP, says in uncertain times it is better to have exposure to equity, debt and gold and an asset allocation strategy works better.
Exposure to real estate will help
Experts say real estate is a good inflation hedge. While most may not want to invest a large sum of money in buying a property, one can look at investing in real estate investment trusts (REITs) that own income-generating commercial real estates and one can buy units of these trusts. At present, there are three REITs — Embassy Office Parks, Mindspace Business Parks and Brookfield India. These are suitable for those who want to put money in a real estate asset for investment purposes. For liquidity, investors can sell their units in the secondary market unlike a capital-intensive physical real estate and the periodic payouts will help investors to meet their cash flow needs.
Realigned bets
Investing in equities will fetch an investor inflation-beating returns in the long run
Target short tenures for FDs as interest rates are likely to rise further
In uncertain times, an asset allocation strategy works better
Look at investing in REITs that own income-generating commercial real estates