Inflation demands unique investment strategies. Here’s a guide for beginners

Inflation is inevitable. Over time, goods and services will get expensive, and the purchasing power of your savings will decline if your investment strategy is not able to generate returns higher than the prevailing inflation levels.

If you are young and new to the real-world effects of inflation, here are some investing for beginners’ nuggets that will help you tide over the inflationary cycle.

Relook at fixed income instruments
 

Fixed-rate investments such as bank deposits, post office savings, and other small savings schemes, especially those placed for the long-term, are most susceptible to loss on account of inflation. The idea is not to eliminate fixed income investments but to compare returns with the current inflation situation.

If the inflation level is higher than the return offered by existing investments, the real returns will be negative both on interest income and principal savings. Most banks and financial institutions revisit deposit rates with changing inflation levels. If the time till maturity is far off, you could liquidate the deposits and rebook them with better interest rates on offer.

If you don’t have any deposits, this serves as an opportune time to gain from higher interest rates. Fixed income assets can give your portfolio the much-needed stability and deliver risk-adjusted returns.

Add the right stocks to your portfolio

Equity is one of the best investment strategies to beat rising inflation. However, not all stocks are created equal. Rising inflation levels can hit some sectors and affect profitability. You need to look at sectors with evergreen demand like consumer staples, pharma, etc. or businesses that can transfer the rising cost to consumers. 

Identifying such stocks can be difficult for new-to-market investors. So, how to invest in share market for beginners? A prudent investing strategy is to identify the top three market leaders across different inflation-proof sectors and build a diverse portfolio of stocks.

Make an allocation towards real estate

The value of tangible long-term assets tends to increase with inflation. Traditionally, the same has been true for real estate in India. Both property prices and rental income yield goes up when the cost of living increases. As a beginner, you may not have the resources to invest directly in a high-value asset like real estate. You can, however, invest on a fractional basis through real estate mutual funds, Real Estate Investment Trusts (REITs), and Alternative Investment Funds (AIFs). Your investment can deliver capital appreciation and generate periodic income from rental investments paid out as dividends. 

Hedge portfolio with commodities

Gold, metals, crude oil, grains, etc., are other physical products whose prices tend to have a direct correlation with inflation. Most commodities have an immediate demand and an indirect demand by way of raw materials for other products. For example, crude oil is refined for petroleum that powers our electricity and transport system, and is also feedstock for plastics, asphalt, and various other intermediary and end-use products. Investing in commodities is one of the smartest inflation protection strategies, as long as the exposure is within your risk appetite.

To sum It up

Investing for beginners while understanding the impact of inflation can be a challenge. It has a learning curve that can be honed over time. With a diversified asset allocation strategy and disciplined approach, you can formulate a portfolio that not only allows you to beat inflation but also generate true long-term wealth. IDFC FIRST Bank helps make it possible with a suite of traditional and new-age investment products, from deposits, mutual funds and direct equity to Sovereign Gold Bonds (SGBs), Unit Linked Insurance Plans (ULIPs), and more. Invest with IDFC FIRST Bank today for a secure tomorrow!

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