Inflation is an investment concept which is eternal – you cannot escape from it! For those individuals who are unfamiliar with this term, inflation refers to the increase in the price of services and goods over time. This leads to decrease in the purchasing power parity of money. If not accounted for inflation, it can eat away a significant part of your returns. Hence, it is very important to account for inflation while planning your investments. This article emphasizes on different types of investment that can help you hedge your investment portfolio.
Hedging with Equities
Equities and equity-related securities have the potential to beat inflation in the long run. Time and again, equities have proved their worth by producing significantly higher returns than any other asset class when invested for a prolonged duration. You can either invest in equity funds, a type of mutual funds or directly invest in stocks. Your investment portfolio must therefore comprise of a few equity-related securities that can help you not only beat inflation, but also generate substantial amount of wealth over time. It is advised to link your equity investments with long-term financial goals. This will ensure that you stay invested for a longer duration and give your investments the required time to grow to their maximum potential. As an investor, you must ensure that you diversify your equity investments across sectors and market capitalisation according to your risk appetite and investment horizon. This will ensure that you do not allot too much weight too any one type of sector.
For investors looking for the right time to grow their equity investments, there is no right time. As you are planning to stay invested for a long duration, time in the market is more important than timing the markets to generate wealth over time. Also, you must ensure that you do not invest in mutual funds on an ad-hoc basis. Rather, you must carefully lay out a financial plan and using a mutual funds return calculator, evaluate the investment amount needed to reach your financial goals.
Hedge your investment portfolio with gold
Gold is an amazing investment option to hedge your investment portfolio. An investor must allocate at least 10% of their assets to gold (gold bars, gold funds, gold jewellery) for long-term financial goals. Experts suggest investing in gold funds as there is no risk of theft or hassle of storing physical gold. In situations, when the inflation rates are exceptionally high, gold as a commodity performs extraordinarily as gold prices tend to increase sharply.
Impact of inflation on debt funds
Inflation eats the returns generated by both financial instruments – fixed-income securities and equities. When the economy witnesses growth, slight inflation with corresponding increase in interest rate prices is unavoidable. Interest rate prices are inversely proportional to bond prices. Thus, with increase in inflation rates, the interest rates also increase, which leads to decrease in bond prices. This also results in the fall of the NAV (net asset value) of debt funds. Hence, in such situations, it makes sense to invest in low duration debt funds rather than investing in long duration debt funds. Basically, invest in debt funds that have lower investment horizon. Happy investing!