Ways to inflation-proof your investments

With inflation marching forward every year, the common man has been at the receiving end for quite some time.

Updated: Sep 10, 2013, 10:08 AM IST

A weak economy, a sinking rupee and a volatile stock market — India stares at one of the worst crises since 1991. While many fear a repeat of the 1991 economic disaster, the government has time and again denied the possibility. And quite emphatically at that. However, all we have seen are assurances without any actions to match them.

With inflation marching forward every year, the common man has been at the receiving end for quite some time. The skyrocketing prices and fast-depleting savings have only made things worse.

While the economic situation remains volatile and the future uncertain, investors are at a loss of ideas on how to protect their investments during these tough times.

Here is what Manish Javeri, head of financial services at The Financial Boutique, an advisory firm based in Mumbai, has to say, "Higher inflation means investments have to earn more just to break even. Some investments designed to keep ahead of inflation aren't the sweet deals they appear to be. What you need is a portfolio review, and maybe a tune-up, to keep inflation at bay.

"Retired people are even more vulnerable to inflation than younger people who are still working. Unfortunately, the traditional balanced portfolio of stocks and bonds doesn’t do especially well when interest rates and inflation are on the rise."

Javeri adds, "Fixed income is the worst hit: when interest rates soar, bond values plunge and inflation eats away at the purchasing power of the interest and principal. With fixed income and fixed deposits you can reduce the impact but, cannot totally protect yourself from rising interest rates and inflation. Though investors generally correlate gold with inflation, many factors — from jewellery demand in India to whether central banks are buying or selling it — affect its price."

So, how does one make his/her investments inflation proof? Here is what Javeri advises:

For Short Term (1-2 years):

1. Secured NCDs of good companies: These are fixed coupon debuntures backed with security. 10 to 15% of your portfolio should be assigned to this category.

2. Short Term Debt Funds (18 months-24 months)

3. Fixed Maturity Plans

For Medium Term (2-5 years):

1. Debt Funds (Average maturity period 2-5 years)

For Long Term (5 years and above)

1. Tax free Bonds (REC, HUDCO, etc): These bonds give a fixed coupon rate for long term (currently at 8.1% to 8.7%).

2. Direct Equity and Equity products: Over a period of 7-8 years, equities generally beat inflation. (Currently a good time to do staggered investment)

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Inflation Indexed Bonds: Currently such products are available in international markets, which are directly linked to the inflation index of a company. India, after witnessing huge fluctuations in inflation, might see a launch of this product in near future.

DNA/Aditi Shome-Ray