How to Invest During High Inflation

By Angel One | Updated on 23 June 2022 | 582

How to Invest During High Inflation

We all dread the word ‘inflation‘, but in an economy, inflation is unavoidable. Low to moderate inflation is believed to positively impact the economy in multiple ways than deflation, which is the opposite of inflation. But there occur situations when inflation increases, creating a widespread panic situation. Currently, the Indian economy is going through a phase we can call ‘transitory inflation’. There is an overall price rise from fuel to food items and edible oil, putting pressure on our finances and savings. To battle a tough time like this, investors must act to reduce their inflation anxiety. Investing strategies during inflation should focus on protecting their money’s current and future values.

Understanding Inflation

In finance, inflation is described as a gradual decline in the purchasing power of money. As the general price of goods and services increases in the economy, each unit of money will buy fewer items.

For example, you can’t buy the same amount of goods with Rs 100 as you could ten years ago. The purchasing power of Rs 100 has declined in the last ten years, and the prices of the goods have increased.

Inflation has several negative implications, but most economic experts agree that moderate inflation is good for the economy. It has positive side effects and indicates a healthy economy.

  • Unemployment reduction due to minimum wage rigidity
  • Makes loans easy
  • Paves ways for implementing monetary policies
  • Prevents deflation

Impact on different asset classes

Understanding how different assets behave in connection with inflation will help you select the right ones.

Fixed-rate savings

Long-term fixed-rate investments are more susceptible to inflation than short-term ones because the impact of inflation on returns compounds with time. Inflation devalues both interest rate repayment and principal repayments.

Commodities

Commodity prices appreciate when inflation rises, providing better hedging. Gold and other precious metals are safe havens against inflation. Besides, prices of other commodities like real estate, raw materials, and agricultural products also increased during inflation.

Real estate

In the past, real estate has done exceptionally well during high inflation periods. Investors can invest in this asset class by purchasing physical assets or REITs.

Bonds

Inflation-indexed bonds with variable interest rates are preferred during hyperinflation situations against fixed-interest rate bonds. Bond returns pegged with the Consumer Price Index offer a better hedge against inflation.

Stocks

Stocks provide the best inflation-adjusted returns than any other asset class. Companies like the consumer staple category pass the higher input cost to consumers during inflation and amplify their profit.

Why is India’s current inflation situation a concern?

Inflation is at present rising in the Indian economy. There are several reasons for that.

  • COVID has caused a global production and supply chain disruption, impacting the world economy
  • There is a sudden increase in demand as countries are trying to bounce back to normal
  • Crude oil and commodity prices rise due to the Russia-Ukraine war

The increase in crude oil price rise has sent the prices of vegetables and other staple items skyrocketing. Prices of petroleum products and LPG have also increased because of it. India’s current inflation rate is at a 17-month high of 6.95 percent, staying above the 6 percent cutoff for three consecutive months.

The consumer price index tracks retail inflation has increased for vegetables, oil and fat, and meat and fish. The RBI has recently boosted the inflation forecast from 4.5 percent to 5.7 percent for the current fiscal, 2022-23.

Best investment strategies to beat rising inflation

Investors prepare to safeguard their money when a tough time is around the corner. Best investing strategies while the economy is in the grip of inflation need careful evaluation of all options available.

Equities are best

Historically, equities had provided the best hedge against rising inflation. Inflation increases the prices of a company’s products, boosting its revenue and profit. It’s a win-win for the company and its investors. Equity investment helps investors build wealth and increase their purchasing power over time.

Floating over fixed

Fixed-rate investments are best for offering stability, but fixed-rate returns don’t rise adequately to beat inflation in a situation like this. So, a floating rate is a better option.

While inflation rises, loans become costlier, and the interest on the floating rate bonds increases. Investors can beat the adverse effects of inflation by tilting their portfolio allocation towards floating-rate investments.

Hedge with commodities

Usually, with inflation, commodity price increases in the economy. Several commodities like real estate, gold, metal and some stocks and bonds effectively hedge against inflation. Like floating rate bonds, allocating part of your portfolio to goods can curb inflation anxiety.

Final words

Investing in a volatile market increases risk exposure. It is the time to make calculated decisions. Don’t stray from your investment plans and the timeline you have. Investors should continue investing consistently, particularly if they have a long time horizon. Consider diversification and rebalancing for risk moderation with the advice given above.

Disclaimer: Angel One Limited does not endorse investment and trade in cryptocurrencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.