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How Can You Beat The Bugbear Called Inflation - Hope For The Best But Prepare For The Worst

By - Research Team    |    Updated On 19 September 2015 |    Financial Planning

How Can You Beat The Bugbear Called Inflation - Hope For The Best But Prepare For The Worst


Do you still get nightmares which keep you awake at night? Do you see yourself being trampled by a herd of buffaloes? Yes inflation represents that herd of buffaloes. Inflation has this knack of creeping up suddenly on you when you least expect it. Inflation causes massive damage to ones investments. Before one realizes all ones wealth is eroded. One has surely heard the proverb "There’s No Time Like The Present". If one wants to beat inflation one has to prepare for it .One has to start by reading up the financial instruments which help you to beat inflation. If one were to study the current state of the economy one notices a policy paralysis in the government. There is no decisive push being given to the economy.

Most of the industrial sectors are in stagnation. Retail inflation is peaking. Our Current Account Deficits are reaching very high levels. All this means that your returns need to grow at a faster rate than inflation. Care to know which instruments help you to beat inflation? I would like to remind you that the team of Financial Planners at are always there for you to plan your financial needs in a most effective and efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 022 6181 6111.

Is Gold A Hedge Against Inflation?

Gold for centuries has been used as a hedge against inflation. Even in ancient times in almost all parts of the world gold could purchase food ,clothing ,shelter and a fair measure of luxury .Even today gold continues to maintain its lustre. It certainly commands a premium. So Why Is Gold A Safe Haven In Times Of Inflation? When inflation goes up the price of gold goes up. Gold Beats Inflation. The precious metals of silver and platinum are commodities with industrial applications. Gold is a stored commodity. Its values likes locked up in safes and households in Asian countries particularly India where greed for this precious metal continues unabashed.

Gold does not get tarnished. Gold mined thousands of years ago is no different in quality than gold mined today. Gold is known to follow the price movement of oil. When the price of oil shoots up so does gold. Gold is heavily traded in US Dollars .Any decline in the value of the dollar leads to a rise in the price of gold. As the dollar gains in value against the rupee gold price in India increases. A depreciating rupee leads to a rise in gold prices as we import huge quantities of gold. One must have noticed in the years following the US Subprime Crisis and the great stock market crash of 2008 gold "Rose Like A Phoenix" from INR 12500 to INR 31800 per 10 grams in a span of four years up to the end of the year 2012.Gold not only served as a hedge against inflation but also generated stupendous rates of return.

The US Dollar is the Worlds reserve currency and is stored in Central Banks across the World particularly in Asian countries of Japan, China, South Korea and Philippines. The reserves of Japan and China are over a trillion dollars each. Any decrease in the value of the dollar causes the price of gold to shoot up and as the US Dollar is no longer backed by gold it tends to be a fancy paper. Gold mining across the world is in a decline. Demand in countries like China and India is far more than the mined supply of gold. This demand of gold helps to maintain the value and the price of gold. The price of gold is immune to scandals and stock market crashes and even if it loses its value in the short term one can expect gold to regain its value as it has done for centuries. Another important point to be noted is the price movement of gold in the opposite direction to stocks and equity.

The movement of gold is negatively correlated to stocks. This means that gold functions as an important diversifier of ones portfolio. One needs to see that at least 20% of one’s portfolio is allocated to gold. One can use the SIP route to invest in Gold ETF’s in India thereby purchasing gold for the long term. The depreciation in the value of the rupee vis-à-vis the dollar as well as the legendary Indian appetite for gold should more or less guarantee a good return in the long term and a bull run for gold.

Are Equities A Boon Or a Bane Against Inflation?

One has surely noticed the phenomenal rise in the prices of various stocks in the BSE Sensex and the Nifty in the last four years in India. The prices of stocks in IT, Infrastructure, FMCG, Pharma and Automobiles had reached sky high levels Thought of entering the stock markets as an investor. I am sure one would have to keep postponing one’s investment in the stock market due to the BSE Sensex having crossed 20000 levels a few months back. Currently one notices that apart from select IT Stocks and the Pharma segment most of the stocks especially banking stocks have been heavily beaten down.So When Is The Best Time To Enter The Stock Market? Should You Try To Time The Market? One of the safest methods to enter the stock market is the SIP route. One gets more number of shares when the market is in a downward trend and when the markets are peaking lesser number of shares are obtained.

However in this case one needs to note one’s capabilities when choosing whether to invest directly in the equity market by directly purchasing shares or invest through equity mutual funds. Both these methods have their own advantages and since equity mutual funds are managed by a fund manager they are safer for the people who are new to investing in stocks and provide a measure of protection. One needs to invest in equity diversified mutual funds as they invest in different categories and different sectors of stocks and provide a measure of safety. However one needs to stay invested for long periods of time. Try to maintain a 10 year investment horizon. In the last four years the BSE Sensex has risen from abysmally low levels of 8000-9000 in the Year 2008-2009 to over 20000 levels a few months back.

Imagine if you had stayed invested for the last four years in the stock markets. In the previous year of 2012 the NSE yielded returns of around 27% which was the second highest in the World .Over a long term equities yield returns as high as 20%.Clearly this is an inflation beater. However it would be wise to shift a portion of your equity into debt after you get phenomenally high returns in equity.

Why Are Equity Instruments Feared In India?

Investors in equity in India are a careful lot. A large number of investors in India especially in direct equity have shifted to debt instruments in the past few years. So Why Does This Happen? A number of investors have burnt their fingers in the stock market in the past few years and do not want to have anything to do with the stock markets. Investors invest for a short period of time pocket 10-15% rate of return and then exit quickly. They do not like to stay invested in the market. They shift their returns into debt instruments as a safety measure. In India profit booking is the sole reason people invest in the markets in order to cash out their existing losses. By the time they make a decision to invest the market has risen to very high levels.

Most of the Indian Investors are play safe or risk averse investors who want to cash in on a quick profit. Indians first focus on real estate and gold purchases. Equity comes later. Most of us Indians invest heavily in savings with a percentage as high as 26% . Most of this is parked in savings bank accounts..However savings bank accounts give returns of around 4% while equity can give returns as high as 20% in some cases. However it would be wise to remember not to invest your livelihood in stocks .Invest only the excess amounts or surplus cash in stocks in order to tap in the benefits these instruments yield.

I would like to end this article with the famous saying "Insanity Is Doing The Same Thing Over And Over Again But Expecting A Different Set Of Results". Always study Inflation so that you know which financial instruments help you to beat inflation. This would help you to maximise your returns in the long run.


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