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Are your stocks covering inflation risk?
Tue, 4 Jan Pre-Open

The desire to buy stocks stems from the need for higher returns. But in the quest for higher returns, it is easy for most investors to sidestep objectivity. That is whether or not the returns expected are commensurate with the risks. Stocks feature very high on the risk parameter amongst the investing options that a typical investor has. But so should be the 'real' returns. Real returns here refer to the return on the stock after adjusting for inflation.

At times as these when inflation is a major worry, it is the minimal risk that stocks should cover. Simply put, the average annual returns from the stocks should comfortably exceed inflation at the consumer level. However, not all is achieved by measuring the inflation risk. The impact of price rise on the company's earnings also needs to be factored in adequately. Only then can one arrive at the correct risk return scenario.

Nevertheless, investors often mistake high return stocks to be sacred. That is the biggest gainers in their portfolio tend to remain despite offering very little upside in the medium term. For investors fail to check their inflation covering potential. The fact that the stock is too over priced to deliver returns higher than the inflation rate fails their notice. And here their either end up losing money with correction in the stock price. Or keeping their funds invested earning negative real returns.

Thus at times as these when even the risk free rates are competing with stock returns, it helps to keep a closer eye on both. It would probably be advisable to at times choose the risk free return (on FDs etc) instead of staying invested in sacred stock.

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Feb 20, 2018 03:35 PM