The reason you invest your money is to earn better returns. But high inflation can be a nightmare, particularly when coupled with low savings interest rates of traditional investments (like bank deposits).
What if, you came to know that your investments are not protecting your wealth from inflation?
In such scenario, thebest option is to adhere to investments that generate inflation-adjusted returns.However, the definitionof ‘best investment options’, could be a cause for debate, as the criteria for deciding this may differ from one person to another. But, you can safely say that any investment that gives you stable returns, by beating inflation over the long term, is the best investment option.
Considering that interest rates in our country are dwindling, where could you possibly find best investments which meet this criterion? Don’t fret! Follow the investment advice given below:
- Invest with a Goal
Some peopleare well aware that they need to invest and likewise act upon it. After all, the prospect of seeing money grow is enticing to everyone. The issue is that few individuals rarely set aside time to create investment plans. Rather theysimply make random investments, which hardly work out well.
Having an investment goal will help you to remain on track and achieve your financial objectives. For this, you need to consider your short-term and the long-term goals and choose a proper investment horizon.
Moreover, long-term investing may help in achieving your long-term goals.Also, there is a high likelihood of getting decent inflation-adjusted returns from long-term investment options. And what tops off an already good thing is-the long-term capital gains on investments like equity mutual funds and stocks are tax-exempt.
- Understand Where to Invest
While looking for investments, you must focus on what is the real return on investment(net of inflation). Have a lookout for investments whose returns are more than the prevailing inflation rate. Know which investments amongst equities, mutual funds, insurance and so on will help you beat inflation.
Likewise choose your investments catering to your various financial needs (if your needs are short term, investment avenues can be different as compared to long-term needs). Also, it’s better to assume a higher inflation rate when you start investing for long-term goals.
- Invest in Stocks
When you invest in the stocks, you contribute to anorganisation’s capital, provided it is listed on the stock exchange. Investing in stocks/equities can prove to be the best way to stay ahead of inflation. This is true if you stay invested for the long term. Here, long-term can be safely assumed as staying invested for at least eight years or more.
Althoughequity-related investments have proved to beat inflation, alot of investors remain apprehensive of investing in them due to various fears, despite the capacity.
The most vital thing to remember is- good returns are possible only if you are careful when choosing the stock in which you wish to invest.
- Invest in Mutual Funds
These days the trend is to invest in stock markets through mutual funds. The reason being, for a given value of theinvestment, mutual funds are likely to provide higher returns after inflation. So, if you want to invest in equities and bond with a balance of risk and return you can choose to invest in mutual funds.Essentially, long-term investment in mutual fund seems to give better returns when compared to short-terminvestment.
Since your investments in mutual funds are diversified, it turns into a substantially more secure alternative in comparison todirectly investing in the stock market. Another positive point is- mutual funds are managed by well-trained and skilled fund managers who take care ofyourinvestment portfolio in a better way.
- Invest in ULIPs
Life insurance product such as unit-linked insurance plans (ULIPs) can be considered a more reliable wealth creation solution over the long term. Moreover, it is a single product with combined features of protection, returns, and tax savings. Another unique proposition of ULIP is that it permits investing your premium in a mix of equity and debt funds. This investment is done in varying proportions, and ULIPsallows inter-fund transfers through switches, with no tax liability.
Over a longerrun (10-20 years), ULIPs can generate potentially higher returns than traditional savings like PPF/fixed deposits/ bonds and help you to beat inflation. This is because returnsgenerated through ULIPs are indirectly linked to returnsgenerated by stock markets.
Asinvestment in insurance is generally for longer-term,ULIPs do not face much redemption pressures and hence allow fund managers to design betterinvestment strategies.
- Know When to Switch
People invest in different investments as per their riskappetite.Furthermore, considering various investment types, an investor may be a bit of both,i.e.he may likely have an appetite for risk; there is only a variation in intensity.
So, it makes sense to invest in a mix of assets- low risk and high-risk investments. However, the key here is to understand when to switch. For instance, if your high-risk investments are performing extremely well, it would make sense to invest the returns generated from them in low-risk assets and so on. This works best when invested in a portfolio of investments based on risk profile and goals.
A Case Study:
Suresh hasRs 2,000 in savings bank account, out of which he investsRs 1,000 in a large-cap equity mutual fund for five years. Consider the below data:
- Average Inflation is 6%
- Average Savings Bank Account Return is 4%
- Average Large Cap Equity Returns is 14%
After five years, the inflation-adjusted values are:
- For savings bank account:
Returns before inflation: Rs. 1,216.65
Inflation-Adjusted Returns: Rs. 909
- Large Cap Equity Fund:
Returns before inflation: Rs. 1,925.41
Inflation-Adjusted Returns: Rs. 1,438.97
In the above example, the value of money in savings bank account decreased (due to inflation). However, equity mutual fund’s high returns caused an increase in the investment value even in real return terms.Hence, it won’t be wrong to say that, if you are not investing resources into equity out of fear, you are missing out on returns.
You cannot ignore the corrosive impact of rising prices on investments. Inflation is catching up with you and diminishing your wealth, even if you are saving to the brim of your capacity. Keeping your savings in an inflation-adjusted investment is the way to beat inflation.
Moreover, your investment plans must be designed to assist you in your short, medium and long-term goal planning. Additionally, conducting an annual review of your investment interest rates will help you take action on lower-paying investments and give your savings a better chance of battling the effects of inflation.