Invest in property, hedge inflation risk
Inflation has touched high levels. It soared past the seven percent
mark pulling up with it prices of food, essential
commodities and manufactured goods.
What is inflation?
Inflation is defined as a persistent increase in the level of consumer
prices or a constant decline in the purchasing
power of money, caused by an increase in available currency and credit
beyond the pro****tion of available goods
and services. A general upward price movement of goods and services is
noticed in such an economy.
In this scenario, the price of money is seen going down. The reason
can be the creation and circulation of excess
money in the system. The Reserve Bank of India (RBI) tries to bridle
in inflation by resorting to monetary measures
like hike in interest rate or tighten money supply through a hike in
the cash reserve ratio (CRR).
Investments in debt
Debt or fixed income instruments seek to preserve capital and provide
relatively small returns. These are low-risk,
low-return investments. In an inflationary economy, investment in debt
may not work out to be feasible.
Suppose there is an instrument that yields four percent returns and
the lock-in period is five years. If inflation is
marching up with leaps and bounds, the value or purchasing power of
money will come down in these five years. In
order to beat inflation, the returns have to be greater than the
meager four percent.
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Debt funds and bonds will erode your hard-earned money in a high
inflation economy. The minimal returns from
long-term bank deposits will not help you for your expenses like
saving for children's marriage or education.
Investments in equity
The stock markets are highly volatile. There are times of bull rides,
and at other times, disappointing bear market
conditions. The alternating patterns of ups and downs take investors
by surprise. This unpredictability is a major
drawback of equity. Many investors churn out big profits, many others
lose everything.
Investments in equity must be done with a long-term perspective. Small
investors can see good returns if they
stay invested for 5-10 years. Stock markets are an excellent hedge
against inflation. But the investor must be
knowledgeable to pick fundamentally-strong stocks with excellent
growth potential. Wrong picks can prove
detrimental.
Investments in property
Investments in property are an excellent hedge against inflation. With
inflation the construction costs are bound to
go upwards. As the years roll by, the value of the property increases
many times. Unlike investments in debt, the
returns here are in line with inflation.
Investing in a house or piece of land gives you the pride of
owner****p, much-needed capital appreciation and
excellent rate of returns. It is considered a wise way of risk
diversification and an excellent hedge against inflation.
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