Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
3 Ways to Beat Inflation's Inevitable Impact - Outside View by PersonalFN
3 Ways to Beat Inflation's Inevitable Impact

Have you ever thought of what a financial professional is doing when dispensing advice? He or she is basically taking an educated guess about what is going to happen in the future and suggesting a way in which you can take advantage of that future situation by taking action in the present.

This involves making assumptions, and if something is based on assumptions, it can never be truly guaranteed. But there are some things, which despite the lack of a guarantee, are going to happen to everybody. And this article is about neither death nor taxes.

Life is going to become more expensive. Your money's earning power is going to erode. Inflation is going to eat into the real value of your money. And you need to take steps to not just grow your wealth, but to grow your wealth continuously, and beat inflation by a wide margin every year.

Let's start at the beginning and move quickly into the steps we need to take to beat inflation.

Investopedia defines Inflation as: the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

This means that if you're investing for goals that are years away such as y our kids' educations, marriages, and your own retirement, you will need a lot more money when these goals actually arrive, than you would need if they were happening today.

The Government puts out 2 inflation figures every year, the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). The CPI measures the consumer prices of a defined basket of commodities in different cities in India. Neither of these is the real level of inflation that affects you, the consumer. You can safely assume that the inflation level that you face is higher than even the higher of the two government released figures, that is the CPI.

With the price of fuel increasing and the monsoon being weak, inflation this year and next is likely to be higher than last year. RBI's credit policy has also voiced concern over the inflation figure which is expected to cross 8% this financial year.

So what do you need to do?

  1. Look at Your Entire Portfolio One Piece at a Time, and Inflation-Proof it

    In each asset class, especially today thanks to the current high interest rate scenario, you need to choose investments that have beaten inflation consistently. If, in your fixed income portfolio, you invest in a corporate FD that yields 10% p.a. post tax (considering indexation), you should note that the real return is actually closer to 3% per annum, after considering 8% inflation.

    Include inflation hedged investments such as gold and if you can, real estate. Traditionally, a portfolio mix should consist of:

    1. Fixed income: low risk, safe yields, bank and corporate deposits, bond funds

    2. Equities: high risk, high capital appreciation, mutual funds and direct equities

    3. Pure Inflation Hedges: gold provides a low to medium risk inflation hedge that also offers a hedge against equity market volatility. In the sub-prime crisis, when equity markets fell, gold rose 30% due to the flight to safety.

  2. Bump Up Your Gold Exposure

    Typically, your invested portfolio weight should include 10% exposure to gold at all times.

    Increasing gold exposure to this level is not easy to do in one step, so start an SIP or invest regularly into a gold ETF. But also keep in mind, that gold is not without its own risks.

    Currently, the global situation for gold is negative. It is, in our opinion, temporarily struggling to maintain its position as a respected medium of exchange. As the US Doller appreciates, gold loses value in dollar terms. However, for economies such as ours, that have traditionally been gold hoarders, local gold prices have gone up as our currencies have gone down in value. But in the long term, even after our currency regains value against the USD, gold will still have two very strong qualities: it is a true financial asset i.e. it is not backed by paper money that governments can print at will, and it has a use in jewellery and manufacturing.

    People have also used real estate exposure to successfully hedge against inflation and in some cases, beat equity as well, but the real estate market is murky and difficult to advise on.

  3. Slowly and Steadily Continue Increasing Equity Exposure

    Historically, inflation has been in the range of 6-7%.

    Historically, equities have given a return of 15-18% and even averaged above 20% per annum during the period 1980 to 1996.

    While inflation will likely only go up from here, and equity returns are unlikely to stay that high, you can still expect that over the long term assuming inflation is 8% per annum and equities give a return of 12-15% p.a., your equity portfolio will beat inflation, delivering a healthy 4-7% post tax, post inflation, real return.

    But remember that when including equity in your portfolio, whether by way of safe, less rewarding mutual funds or riskier, more rewarding direct equity, you must do so only in the proportion that your life goals indicate within your Financial Plan.

    If you have less than 3 years to a life goal, your investments for this goal should avoid equity completely and be only in debt funds and other fixed income products. If you have more than 3-5 years left for a life goal, you can have some equity exposure and balance it out with debt and gold exposure.
To Wrap...

Official inflation measures such as the WPI and CPI are not accurate to your individual situation, the inflation you face is likely higher. If you take the above 3 steps, as soon as possible, and under the right professional guidance, you can and will likely beat inflation and achieve your life goals. Remember, time is money, and it's best not to delay these steps.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.


Equitymaster requests your view! Post a comment on "3 Ways to Beat Inflation's Inevitable Impact". Click here!


More Views on News

The Right Financial Advisor Is Around the Corner (Outside View)

Mar 10, 2016

An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.

Why financial planning should be dull and boring (Mutual Fund Corner)

Feb 29, 2016

Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.

What Are E-Wallets And How To Use Them (Mutual Fund Corner)

Feb 12, 2016

PersonalFN highlights the benefits of parking a portion of your expenses in e-wallets and using them efficiently.

Is Consumption Boom Over In India? (Mutual Fund Corner)

Feb 2, 2016

Mutual funds take a bearish call on the FMCG sector. The sector has started playing out due to a combination of slower growth and expensive valuations.

How to Find a Saint Amongst Sinners? (Mutual Fund Corner)

Feb 1, 2016

Ethical practices help build long lasting relationships, and healthy long-term business relationships are often mutually rewarding. But PersonalFN is of the view that the financial services industry in India seems to have forgotten this.

More Views on News

Most Popular

A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

Aug 10, 2017

Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

Aug 10, 2017

Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

Bitcoin Continues Stellar Rise(Chart Of The Day)

Aug 10, 2017

Bitcoin hits an all-time high, is there more upside left?

5 Steps To Become Financially Independent(Outside View)

Aug 16, 2017

Ensure your financial Independence, and pledge to start the journey towards financial freedom today!


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms