Beating Inflation: India's Investment Strategies

Inflation is a very real concern for investors, especially in India, where it has impacted the cost of basic amenities like edible oil, crude oil, and vegetables. The good news is that there are ways to beat inflation and protect your investments.

The first step is to understand what inflation is and how it works. Simply put, inflation is the increase in prices for goods and services over time, which results in a decrease in the purchasing power of your money. This means that the same amount of money will buy you less over time.

To beat inflation, your investments need to generate returns that are higher than the inflation rate. This is known as beating inflation. One strategy to achieve this is to invest in assets, securities, or products with a high chance of delivering returns similar to or higher than the inflation rate.

There are several investment options available in India, including equity-related investments, gold, real estate, mutual funds, and certain types of bonds. Diversification is also key—spreading your investments across different asset classes can help manage risks and optimise returns.

It's important to remember that there is no guaranteed way to beat inflation, and even fixed-return instruments like fixed deposits may not always provide inflation-beating returns. Consulting a financial advisor can help you make informed decisions about your investments and create a strategy tailored to your goals and risk tolerance.

Invest in stocks, bonds and equity funds

When it comes to investing in stocks, bonds, and equity funds to beat inflation in India, there are a few things to keep in mind.

Firstly, it's important to understand the concept of inflation and how it affects your investments. Inflation refers to the gradual increase in the prices of goods and services over time, which leads to a decline in the purchasing power of your money. In simple terms, it means that the same amount of money will buy you fewer goods in the future than it does today.

To beat inflation, your investments should aim to generate returns that are higher than the inflation rate. This is crucial to maintain the purchasing power of your money. For example, if you invest Rs. 100 in a scheme that offers a 4% return, and the inflation rate is 5.5%, your investment returns are essentially nullified as the purchasing power of your money has decreased.

Now, let's delve into the world of stocks, bonds, and equity funds in India:

Stocks

Investing in the stock market can be a great way to beat inflation over the long term. Historically, stock returns have outperformed inflation rates. While there may be short-term volatility and ups and downs, the market tends to recover over time. For example, the Sensex reached 61,000 in October 2021, up from around 25,000 in October 2020, demonstrating the market's ability to bounce back.

When investing in stocks, it's important to conduct thorough research and consider the company's financials, shareholding patterns, and share price movement over the years. You can invest in stocks through the primary market, by subscribing to initial public offerings (IPOs), or through the secondary market by purchasing shares via a trading account.

Equity Funds

Equity mutual funds are a great option for those who want to invest in the stock market but don't want to deal with the day-to-day monitoring of individual stocks. These funds are managed by professionals, offering a more hands-off approach for investors. Equity funds come in various types, including market capitalization-based funds, sectoral funds, tax-saving funds, and more, allowing you to choose the ones that align with your investment goals and risk appetite.

Most equity funds have consistently delivered returns above 10% over 5 and 10-year periods, making them a strong contender for beating inflation.

Bonds

Bonds, particularly inflation-indexed bonds (IIPs), can be a strategic addition to your investment portfolio to combat inflation. IIPs are issued by the Government of India and are designed specifically to protect investors from inflation. The unique feature of IIPs is that the principal amount is adjusted against inflation, ensuring that your investment grows in line with inflation.

Additionally, bonds or debt funds that invest in bonds tend to be linked to interest rates, which often rise with inflation. As interest rates and bond prices move in opposite directions, investing in bonds can be a way to hedge against inflation. However, it's important to remember that bond prices can be volatile, and diversification is crucial to managing returns and preserving capital.

In conclusion, investing in stocks, equity funds, and bonds can be a powerful strategy to beat inflation in India. By conducting thorough research, understanding your risk profile, and diversifying your portfolio, you can aim to generate returns that outpace inflation, protecting your purchasing power and growing your wealth over time.

Diversify your portfolio

Diversifying your portfolio is a crucial step in beating inflation. Here are some ways to do so:

Gold-Oriented Investments

Gold is a traditionally popular investment option in India, often seen as a safer alternative to the volatile stock market. Gold investments have generally outperformed the average inflation rate. Since India's independence in 1947, the value of gold has increased by over 60,000%.

You can invest in gold in various ways, such as purchasing physical gold (coins, bars, or jewellery), investing in gold mutual funds, or buying Sovereign Gold Bonds (SGBs). SGBs are RBI-issued government securities denominated in grams of gold and make for an excellent alternative to physical gold.

However, when investing in gold jewellery, be mindful of the various associated costs, such as making charges, storage, insurance, and GST. There is also the risk of theft. Therefore, it is recommended to explore gold investments in forms other than physical gold/jewellery.

Equity Investments

Equity is another way to diversify your portfolio and has long been known as one of the most rewarding asset classes for long-term investments. BSE Sensex, India's oldest stock exchange, has delivered healthy returns over time.

You can invest in equity through direct stock investments, where you analyse and invest in stocks independently through a trading/Demat account. Alternatively, you can choose equity mutual funds, where fund managers pool money from investors and build an equity portfolio according to the scheme's objectives, eliminating the need for individual stock analysis.

Debt Mutual Funds

Debt mutual funds provide stability to your portfolio in the long run and are suitable for short-term goals. There are 16 types of debt mutual funds with maturities ranging from one day to several years, allowing you to choose based on your investment objectives and horizon.

Inflation-Indexed Bonds

Issued by the RBI, these bonds have a flexible principal amount that adjusts according to the inflation rate. Investors earn interest income on the adjusted principal, helping to beat inflation.

Mutual Funds

Mutual funds are an excellent way to diversify your portfolio by investing in multiple companies or sectors. They offer individual investors exposure to a diverse range of stocks at a lower cost, managed by professional portfolio managers.

Real Estate

Real estate is another option to consider when diversifying your portfolio. You can invest directly by buying property or indirectly through real estate investment trusts (REITs). REITs allow small and medium investors to participate in the commercial real estate market.

Other Options

Other investment avenues to explore include exchange-traded funds (ETFs), fixed-income instruments (PPF, SSY, FD, RD, or post office savings), and balanced advantage funds (BAFs).

Remember, the key to successful diversification is to allocate your investments across different asset classes to manage risks and optimise returns. It is also essential to regularly review and adjust your portfolio to align with changing economic conditions and your financial goals.

Invest in gold

Gold is considered a 'safe haven' by experts worldwide and is used as a hedge against inflation. Gold is a commodity, not a paper asset, and its value typically increases over time. For example, in 2017, the value of 10 grams of gold was INR 29,667.50, and by September 2023, it had risen by almost 40% to INR 50,911. Gold has a good historical track record and has preserved its value for longer periods compared to other assets.

Gold is also a good investment option during times of rupee depreciation. When commodity prices soar, inflation often devalues a country's currency. However, gold's value tends to rise when the value of the rupee declines due to inflation. Gold's demand increases when inflation rises, and it has provided positive returns during falling equity markets, depreciating currency, and geopolitical uncertainties.

Physical Gold

Physical gold can be purchased as jewellery, coins, or bars from jewellers, bullion traders, or government-backed institutions. However, there are some downsides to physical gold, including making charges, storage hassles, and an increased risk of theft.

Gold Exchange-Traded Funds (ETFs)

Gold ETFs are units of gold traded on stock market exchanges, allowing investors to buy proportionate ownership in a collective vault instead of physical gold. One gold ETF is equivalent to one gram of gold. ETFs are more liquid than physical gold and do not incur making charges or GST.

Gold Mutual Funds

Gold mutual funds allow investors to invest in gold mining companies rather than physical gold. Popular gold mutual fund companies in India include Invesco India Gold Fund, SBI Gold, Nippon India Gold Savings Fund, and DSP World Gold Fund.

Digital Gold

Digital gold is a growing investment option where investors can buy and sell gold through fintech platforms.

Sovereign Gold Bonds

Sovereign Gold Bonds (SGBs) are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. SGBs offer a guaranteed 2.5% interest rate per annum and can be purchased through banks, post offices, brokers, or online platforms.

Invest in real estate

Real estate has always been considered a safe investment in India, and no amount of uncertainty due to inflation can put pressure on its value. It is a good hedge against inflation as it protects investors from the harmful effects of inflation. The purchasing power of money may decrease, but real estate retains its value.

As the housing market becomes inflationary, home prices increase over time. This means that the loan-to-value of any debt secured against the property decreases, acting as a natural discount and an institutionalised incentive to invest in real estate.

Real estate offers investors a lot of flexibility. They can control the returns by increasing and regulating the rent charged to tenants, or by redeveloping the property to increase its market value. For example, converting it into a commercial space.

There are also tax benefits to owning real estate, and historically, real estate has outperformed the returns of most other alternative asset classes.

The only risk of inflation is the actual rent. Property owners will increase the rent to handle growing inflation or take a loss. As inflation results in higher interest rates, it may take more time to increase rent than to pass over the higher costs to the tenant.

The Indian real estate market is expected to rise at a CAGR of 9.60% between 2022-2027. There is a latent demand for affordable housing in India, which would primarily escalate the request. In addition, the government is investing heavily in building roads, rail and air infrastructure, which will catalyse the overall Indian real estate market.

With the global population projected to touch 8.6 billion in 2030 and India being the most populous country in the world, there is an ever-perennial demand for housing units. In India, there is currently an urban housing shortage of 19 million houses, which is estimated to balloon to 38 million by 2030. In such an environment, investing in real estate could also act as a strategic investment to keep yourself and your family prepared for the projected housing crunch.

Invest in mutual funds

Mutual funds are a great way to beat inflation in India. They are a type of investment vehicle that pools money from multiple investors to purchase a variety of securities, such as stocks, bonds, and other financial instruments.

• Diversification: Mutual funds allow you to diversify your investments across different asset classes, sectors, and industries. By spreading your money across a wide range of investments, you reduce the risk associated with putting all your eggs in one basket. Diversification helps protect your portfolio from the negative impact of inflation.
• Professional Management: Mutual funds are managed by professional fund managers who have expertise in analysing markets, selecting investments, and making timely decisions. They can navigate market fluctuations and make strategic choices to maximise returns, helping your investments stay ahead of inflation.
• Higher Return Potential: Historically, mutual funds, especially equity-oriented mutual funds, have offered higher returns than traditional investment options in India, such as fixed deposits (FDs) and public provident funds (PPFs). By investing in mutual funds, you increase the likelihood of generating returns that outpace inflation, preserving and growing the purchasing power of your money.
• Long-Term Wealth Creation: Mutual funds are typically designed for long-term investment goals. They provide the benefit of compounding returns over time, which helps your investments grow exponentially. This can be particularly effective in countering the erosive effects of inflation on your savings.
• Inflation-Linked Mutual Funds: Certain types of mutual funds are specifically designed to combat inflation. For example, debt mutual funds that invest in inflation-indexed bonds (IIPs) issued by the Government of India are meant to provide returns that beat inflation. The Reserve Bank of India (RBI) adjusts the principal amount of these bonds against inflation, ensuring that your returns remain competitive.
• Convenience and Accessibility: Mutual funds offer a convenient and accessible way to invest. You can start investing with a small amount through a systematic investment plan (SIP), where a fixed amount is deducted from your account at regular intervals. Mutual funds also provide the flexibility to choose from various fund options, such as equity funds, debt funds, hybrid funds, and more, based on your risk appetite and financial goals.

Remember, while mutual funds offer the potential to beat inflation, they do carry market risks. It is essential to carefully consider your investment objectives, risk tolerance, and time horizon before investing. Diversification and long-term investment horizons are key strategies to mitigate risks and maximise the chances of beating inflation.

Frequently asked questions