How to inflation-proof your portfolio. Here are 5 things you can do

Rising inflation is expected to be a serious bottleneck for India’s economy as the country grapples with the third wave of COVID-19 infections.

Rising prices have been a concern for India for more than two years and central banks around the world are worried that Omicron may be keeping up with inflation.

Most investors believe that inflation will be a major hurdle for the markets in 2022 and are concerned about how investments in their portfolios could be affected.

But there are ways to protect your hard earned money from the negative effects of inflation.

Not all investments are negatively affected by inflation. All you have to do is find the right strategies Minimize the impact of inflation on your investments.

Here are 5 ways to inflation-proof your portfolio:

#1. Real Estate and REITs

Real estate is considered a hedge against inflation and can also be a potential earning opportunity when prices rise.

This can be done in two ways.

First, there is direct ownership in which you own the property and earn rent from it. As inflation rises, so does the value of the property, and a landlord may charge higher rents.

This results in the landlord earning higher rental income over time. It is certainly assumed that the cost of maintaining the property does not exceed the rate at which rents have increased.

In fact, one who has purchased a property using a fixed interest rate can also benefit in times of high inflation.

That’s because for the owner, it’s the opposite of buying a bond — you’re paying off the loan with money that’s becoming less valuable. Plus inflation can push up the value of your assets more.

Another option for investing in real estate is indirect ownership through a real estate investment trust (REIT).

REITs are entities that own and operate income-producing real estate. As inflation rises, property prices and rental income rise. A REIT consists of a pool of real estate that pays dividends to its investors.

REITs provide natural protection against inflation. When prices rise, so do real estate rents and values.

This REIT supports dividend growth and provides a reliable stream of income even during inflation.

#2. precious metals

Theory and historical evidence support the inflation-precious metals link.

Precious metal prices benefit from inflation and negative real interest rates.

Unlike paper currencies, you cannot print gold or silver. There is always going to be a limited supply of this available.

Also, precious metals retain their value even when the currency weakens.

Gold has value due to its scarcity and many modern uses. Gold is also intrinsically valuable because it is highly conductive. It plays a vital role in countless industrial and electronic applications.

The symbolic value of gold is another major reason for its continued success.

Silver, in addition to being used for jewellery, also has industrial value. This makes it an important component in electronics and emerging technology.

In times of inflation, investors turn to stable, tangible investments such as physical gold and silver as a way to store their wealth. As a result, this demand has driven up the prices of the precious metal. It provides investors a hedge against inflation and devaluation of their currency.

Traditionally, investors used to buy physical gold and silver in the form of coins, bullion or jewellery. However, nowadays there are newer forms of gold and silver investing, such as gold ETFs and silver ETFs (exchange-traded funds).


#3. Equity – Diversify with the right stocks

In theory, equities should offer a buffer against inflation.

This is because an increase in prices should correspond to an increase in nominal revenue and thus boost share prices.

In practice, the effect of inflation on income will vary by region and its ability to pass on higher input costs to consumers.

It is important to choose the right companies to invest in in times of high inflation. In general, businesses that benefit from inflation are those that enjoy pricing power.

It would be wise to invest in companies that are able to raise their prices along with the rate of inflation (such as FMCG and energy stocks). This could potentially help them maintain their profits, which could benefit investors.

Interest rates are generally raised to beat high inflation. At such times it makes sense to buy and hold value stocks that have strong current cash flows rather than growth stocks that have little or no immediate cash flows.

Value stocks tend to have higher intrinsic value than their current trading value. These are usually stocks of mature, well-established companies with strong current free cash flows.

growth stock Do not offer immediate returns or dividends, but they do demonstrate the potential to outperform the market in the future. The promise of future returns becomes less attractive when inflation reduces the value of those potential returns.

In times of high inflation, earnings stocks can also perform poorly. This is because they pay regular and stable dividends which cannot keep up with inflation in the short run.

Therefore, it is prudent to consider how inflation fits into the macroeconomic picture.

As inflation expectations subside, investors can reallocate funds into cyclical stocks. These are stocks of companies that provide discretionary goods and services. These stocks tend to outperform in a strong economy.

#4. Goods

When inflation is on its ugly head, investing in commodities always fetches interest. Research shows that commodities are one of the asset classes that is most positively correlated with inflation.

Commodities are also unrelated to the stock market. It can add diversification benefits to an investor’s portfolio.

Simply put, commodities are tradable raw materials or agricultural products. Metals, oil, cereals, pulses, spices and natural gas are all examples of commodities.

Investors see intrinsic value in owning and trading commodities because they are important to consumers in their daily lives.

During periods of hyperinflation, economic pressures drive up the price of products and services, making goods more expensive.

Investors hoping to invest in commodities have many different options for doing so.

They can invest in commodities in the form of futures contracts or buy them indirectly through stocks.

Commodity mutual funds and exchange-traded funds (ETFs) can offer broad exposure to commodities without the risk of futures trading.

Investors should be aware that commodities are extremely volatile.

Since commodities are based on demand and supply, even a slight change in supply due to geopolitical tensions or conflict can have a negative impact on pricing.

Be very careful and prudent while trading commodities.

#5. bond

When the prices of goods and services are rising, the bond’s fixed income becomes less attractive because that income buys fewer goods and services.

When inflation rises, interest rates rise and bond prices fall.

Investors can hedge against the immediate effects of inflation by allocating short-term bonds, which often have updated returns.

When interest rates are rising, the option of shorter maturities enables investors to roll over bonds more frequently at higher interest rates. This helps investors keep up with short-term inflation.

Another option for investors is floating rate bonds. RBI launched a floating-rate savings bond in 2020. Interest rates vary and are linked to the National Savings Certificate (NSC).

The rate is subject to change every 6 months but the bond will always pay 0.35% more than the NSC rate.

Mutual funds also offer floating-rate funds. These funds invest at least 65% in floating rate instruments. Such bonds have a base rate plus spread. With the increase or decrease in the repo rate, the yield also changes.

ground level

Inflation can cut a portfolio as much as any other form of risk. The depreciating rupee could put pressure on stocks as well as savings accounts and bond holdings.

The 5 asset classes mentioned above can be a safe way to avoid these pitfalls and protect a wise investor from the forces of high inflation.

Warren Buffett once said that the best thing a person can do to hedge against inflation is to hone their skills and work to stay on top of their field.

“If you’re the best teacher, if you’re the best surgeon, if you’re the best lawyer, you’ll get your share of the national economic pie, whatever the value of the currency,” said Berkshire Hathaway, CEO of the company in 2009. Said at the annual shareholder meeting.

The hedge is not just what you are earning now, but what you can earn later.

Happy investment!

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

(This article is syndicated from) Equitymaster.com,