How To Plan Your Investments During Inflation and Earn Higher Returns?

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The new age investors, who proved to be a major buttress during last year’s bull run of markets across the globe, are facing a substantial blow this year. 2022, by far has been so scathing for the investor community that wealth growth has become a far-fetched dream (for the time being) and we are forced to at least save whatever we have. A fair market correction was expected after the euphoria we witnessed in 2021 but this is not just any other correction!

There are only a few opportunities that teach us the meaning of some words more through experience than textbook learning. The word ‘inflation’ has added itself to the glossary. 

How Bad Inflation Is? Has it Been Exaggerated?

Obviously not! Contrarily, it may have been understated. Let’s have a quick glance at how bad it is this time.

  • In May, the WPI inflation in India peaked at a record high of 15.88%
  • The retail inflation is still above RBI’s target band
  • Inflation in the citadel of the equity market, the USA, topped at 8.6%, one of the highest in the world

The inflationary ripples are very apparent across every sector of the economy. To tackle the same, the Reserve Bank of India, increased the benchmark interest rate by 90 basis points in less than a period of five weeks. The US Fed is also hiked rates by 0.75%. 

Inflation and hike in benchmark rates are highly entangled with the equity market. For example, the US market reacted sharply to the scary inflation data, which was followed by the Indian and all other markets around the world. Nifty, as of exactly mid-May, is trading below 15,800, close to where we started the previous year’s bull run.

Our equity investments are performing poorly, mutual funds bathing in red, and so on. So what can be done? Certainly, there are ways through which we can deal in these inflationary times and save our capital, and if possible, can beat the ill to grow as well. Haven’t you heard- Tough times make stronger and more experienced people? It’s our time now. 

Let’s learn what are the ways through which we can successfully complete the steeplechase race of investment served to us by the great INFLATION!

Any Scope in Equity?

Saying that equities do not perform during inflation will not do enough justice. It is not that all equities perform poorly during such times. There are certain sectors that actually benefit from this. Companies pass on the cost of inflation to the customers and increase revenue and profit from the same. 

Let’s take a look at crude oil, whose prices have soared to unprecedented heights. Oil mining and producing companies can benefit from this. We have a very vivid example of Reliance Industries, as we know, is an oil producing major (along with other things). The shares of Reliance are now trading near their 52-week high when the entire market is near its 52-week low. As of May 15, 2022, the shares of Reliance were trading at Rs 2,367, not much far away from its 52-week high of Rs 2,856. The stock gained around 8% in a month, in which Nifty lost 0.5%. 

Similarly, energy stock prices can also increase during inflation and can serve to be a good hedge against the same. 

What About Commodities?

Commodities prices have soared during the recent inflationary phase. Although you cannot buy and stock commodities in your house and wait for the right time to sell them, you can certainly trade in their futures. For instance, the Crude oil futures (Crude Oil WTI Futures) are now trading near $120, almost near their 52-week high of $123. In the past 12 months, this has gained almost 85%, far better than any other investment instrument.

Revival of Real Estate?

Real estate, for some reason, is losing its popularity among the investors of this generation. But that does not negate the fact that over the last decade, the sector has offered a CAGR of over 11%. During inflationary periods, prices of real estate boom significantly. Increase in the prices of cement, steel, and all such materials pull the price of real estate in the upward direction. 

But how can you invest in real estate? Do you have to buy land or house property? No, there are other ways as well. You can invest in instruments like GRIP that allow you to leverage the real estate inflation in your favour. Such investment vehicles enable you to invest in property leases, rents, etc., and give you a decent return to tackle inflation.

Have Anyone Heard About Fixed Interest Schemes?

Fixed income schemes have been loathed so brutally in the last few years that there has developed a tendency to ignore them in the name of ‘returns’. However, now they are gaining space in the discussion, particularly, after the repo rate hike by the RBI. Increase in inflation has led the central bank to increase the interest rates, which although has made borrowing costlier, favoured bank deposits as well. The increase in interest rates of bank fixed deposits is a lively example of the same. The FD rates have now crossed the 7% mark. You can easily get upto 7.5% from a suitable platform. Agreed that 7.5% is not enough but it is still better than negative returns. Alteast, they can be used for short term returns, and once the markets get stable, we can put the same money back into high return offering instruments.

Bonus Tips

There are a plethora of investment opportunities for every period. It is just that you need to have patience and sound knowledge of the available options. Furthermore, investing is a part of your financial planning, not the planning itself.

  • Apart from curated and cautious investing strategies, you also need to relook into your other financial habits like spending, borrowing, etc. When interest rates are rising and it is decipherable that they will rise further then one should refrain from borrowing and overspending. 
  • Rupee has recently hit its all time low which means your capital is depreciating even though it is not invested anywhere. Hence, it is necessary to protect your savings and wait for the time when you can start again to benefit like normal days.
  • Market downturns have a positive side as well- a number of high quality stocks become light and are available at lower prices. As far as global stocks are concerned, just have a glance at US stocks. Amazon, Apple, Tesla, etc., all are available at very lucrative prices. It is the perfect time to pick some for your portfolio.