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Your Money: Inflation-proof your investment portfolio

Plan your investments in such a way that you are able to beat inflation or at least minimise its impact

Thus, it is essential to draw up the right strategies and make an investment portfolio in such a manner that you would be able to beat the inflation or at least try to minimise its impact on your wealth creation project.
Thus, it is essential to draw up the right strategies and make an investment portfolio in such a manner that you would be able to beat the inflation or at least try to minimise its impact on your wealth creation project.

Rising prices ARE a major concern for everyone ranging from government, companies, consumers and investors. In India, the inflation rate started going up since September 2021 when it was 4.35%, reaching 6.01% in January 2022. This is almost 50% growth. Inflation, if it goes out of control, is surely a value destroyer for everyone. While it is empirically evident that in an inflationary trend bond returns are not attractive, the association between inflation and equity returns is mixed. Thus, it is essential to draw up the right strategies and make an investment portfolio in such a manner that you would be able to beat the inflation or at least try to minimise its impact on your wealth creation project.

What is inflation?
Any economist will define inflation as nothing but too much money chasing too few goods. In other words, a rupee today will not buy the same value of goods five years down the line. Basically, inflation measures the average price level of a basket of goods and services in an economy over a given period of time. There are many reasons why inflation occurs. For the current hike in inflation rate in India the plausible reasons are supply shocks due to the pandemic which disrupts production, high oil prices, raise in production costs, etc.

Gold and Silver ETFs
Historically, gold has been considered as a hedge against inflation. In fact, many investors treat gold as an alternative currency especially when their own country’s currency is losing value. Gold is a real, physical asset, and tends to hold its value for the most part. Silver, again another precious metal, has a lot of industrial value (apart from jewellery usage) as it is an important component in electronics and emerging technology products. As far as investors are concerned, instead of buying gold in physical form, one can buy gold and silver exchange traded funds (ETFs).

Real Estate Investment Trusts
The association between real estate and inflation is negative which means that when inflation is high, property values go up, and thus rent. One of the easiest ways to invest in real estate is through a real estate investment trust (REIT). A real estate investment trust is basically a company which owns and/ or operates different types of income-generating properties such as apartment buildings, commercial shopping complexes, hospitals, etc. However, investors should analyse the business model of REIT before investing because REITs are sensitive to interest rate movements.

Broad market index (BSE500):
Investing in equity shares offer the most upside potential in the long term. In general, businesses that gain the most from inflation are those which are not asset heavy and require less capital. In contrast, businesses which are dealing with natural resources have a negative impact on inflation. Currently, information technology is the second highest concentrated sector (14.44% in the BSE 500). Generally, IT firms are not capital intensive and so, they should be either inflation winners or least impacted by inflation.

Consider alternative asset classes
Under this category one could consider tangible assets such as antiques, art, etc., which could act as an inflation hedge. Generally, the prices and value of these collectables will rise over time, providing returns that exceed the rate of inflation. However, such types of assets are the least liquid and one needs to exercise caution so as not to end up buying a duplicate antique. Investors may also consider investing in selected hedge funds or startups via unlisted shares, etc., which will beat the inflation. But these alternative asset classes are not suitable for everyone and one should invest purely based on their risk profile and investment goals.

To conclude, inflation is a natural occurrence and a disciplined investor can tackle the same by investing in asset classes that we have discussed above, to beat inflation or minimise its impact on their wealth creation journey.

The writer is a professor of finance & accounting, IIM Tiruchirappalli

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