Tips to beat the soaring inflation

Inflation reduces your purchasing power, erodes your net worth and adversely affects your lifestyle in the long run.

Sadly, however, there seems to be no respite from this soaring inflation in sight, at least in the near future. Economists have already warned that inflation is bound to cross a 13-year high of 9 per cent from the current level of around 8 per cent, as a fallout of Wednesday's sharp hike in petrol and diesel prices.

Still you need to look out for some ways to keep your household budget intact. Here are some tips to shield you from this devil..

Rework Your Household Budget
In the times of rising prices, you need to spend your monthly household budget smartly. To maintain your lifestyle, you should limit the household expenses to 70 per cent of your monthly take-home income. "If it is exceeding the limit, you need to judiciously cut down on the unnecessary expense items," says Ramesh Dalal, V-P, Bajaj Capital Financial Planning Group.

For example, you should buy the seasonal fruits and vegetables and avoid the non-seasonal ones, as they are expensive. Control the use of electricity and telephone and try to reduce the expenses on wardrobe, partying, gifts etc. by a certain percentage.

You may also think of enhancing your earning capacity by changing to a better-paying job or doing some part-time work.

Insulate Your Long-Term Goals Against Inflation

Do not let inflation affect your long-term mandatory goals like house purchase, education and marriage of your children and regular income for the retirement years.

"With the help of a qualified financial planner, incorporate the inflation factor in your long-term goals and invest the required amount regularly towards meeting those goals," says Dalal.

For example, if you want to make provision of Rs 10 lakh for your 6-year-old daughter's higher education when she is 18, incorporating an inflation figure of 6 per cent p.a. will give you a figure of Rs 20 lakh at that point of time.

Therefore, you should start an investment plan from now, which will help you accumulate Rs 20 lakh after 12 years

Review Your Financial Goals and Portfolio

In the current scenario of staggering prices, there is a need to review your financial plans and investments as the expenses and corpus required to achieve financial goals may increase.

So, you need to balance your portfolio so that it can generate better inflation-adjusted returns.

Diversify Your Portfolio

Inflation impacts different sectors in different ways. "Due to current inflationary trends, one needs to have a well thought-out sector spread in his investment portfolio. While investing in companies, one should look at how they are being impacted by the rising input and borrowing costs," informs Ashish Kapur, CEO, Invest Shoppe India Ltd.

For example, manufacturing companies or heavy industries, though their stocks, will be available at tempting valuations. However, chances are high that they will further fall in short term, owing to negative sentiment.

Hence, investments should be made in large cap companies having economies of scale and their ability to handle input and borrowing costs.

Stay Invested in Equities

For long-term investment goals like child education, retirement etc, equity can generate handsome inflation-adjusted returns.

Therefore, In spite of the current volatile situation in the equity market, it is advisable to stay invested as this is a cyclical event and in the long run the markets are bound to rise.

Hence, to achieve such goals one should be able to take a calculated risk.

"Consider this bearish trend as a good entry point in garnering blue chip stocks," says Kapur.

Don't Let Your Money Lie Idle, Invest It Wisely

Don't keep on accumulating your money in the savings bank A/c.

Keep only 2-3 times of your monthly household expenses in the liquid form and invest the balance amount regularly in a well-diversified portfolio of equity, short-term debt, real estate, commodities and gold.

It will increase your cash inflows and help you reduce the burden of rising prices.

Check The Real Return On Investment Portfolio

Inflation eats into your net worth by reducing the real return on your investment portfolio. Real returns are inflation adjusted returns.

For example, if you have a bank FD, which earns returns at 8 per cent p.a., and inflation is 8 per cent, then the real return on this investment is zero.

Therefore, you should review your existing portfolio as well as make fresh investments to check whether your absolute returns are beating the rate of inflation by a good margin or not. Equity, commodities, gold and real estate are good investment options to generate a positive real rate of return.

For short-term requirements, you can consider investing in the short-term funds or floater funds. It is generally seen that a high inflationary trend is followed by an upward revision in the interest rates. Hike in the interest rates will adversely affect your long-term debt portfolio. Therefore, during inflationary periods, it is wise to invest in short-term funds and wait to reap high returns.

Add the Shimmer of Gold to Your Portfolio

Historically gold has proved to be the perfect hedge against inflation. After adding gold in your portfolio, the risk remaining the same, the overall inflation-adjusted returns of portfolio can be enhanced.

High inflation, in fact, puts an upward pressure on the interest rates, which in turn create uncertainty in the capital markets.

During such times of crisis, gold as an investment avenue is a good bet. Investment in gold can be made in the form of bullion, coins, jewellery and Gold Funds Exchange Traded Gold Funds, among others.

Avoid Investments In Illiquid Assets

Illiquid assets with low returns restrict the performance of a portfolio.

So, try to exit from such investments and redeploy the amount in asset classes that generate better inflation-adjusted returns.

For example, bank fixed deposits, post office recurring deposits, etc.

The Economic times dt. 14 7 2008

Plan your investment strategically

MUMBAI: The Sensex has fallen by around 34% from its peak of 21,113 in January 2008, and analysts are talking about a further fall to 12,000 levels, with some pessimists not ruling out the index at 10,000 levels.

At the same time, the Reserve Bank of India’s (RBI) measures to curb inflation by reducing demand has resulted in interest rates on the 10-year bond crossing 9%.

Banks are now offering 9.5% on fixed deposits. Given the way interest rates are moving, fixed income returns could touch double-digit levels soon. So, the big question before investors is: should they choose equity or fixed income.

Invest smartly

“Investing in debt is risky in the long-term, while equity carries only a short-term risk. You can go for debt if you are looking at a 2-3 year time horizon,” says financial planner Gaurav Mashruwala.

If you look back to the mid-90s, financial institutions offered as much as 14% on term deposits, but soon rates tumbled and interest rates fell to 8% levels when these deposits came up for renewal.

If you are looking to park a large sum at the moment, you can look at a liquid fund for the next 3-6 months time horizon. “You may not earn great returns, given the soaring headline inflation, but at least your capital will be protected,” contends Transcend India’s director Kartik Jhaveri.

Remember, although returns from debt funds may be high now, but they may be negative after adjusting for inflation.

Park your money accordingly

If your outlook is short term, you can definitely look at debt. If you park your money in fixed maturity plan (FMP), or even bank deposits, you will at least get 3.5%. You can consider FMPs instead of FDs as they offer relatively better returns. If you fall in the higher tax brackets, FMPs are advisable, else you can consider FDs.

But if it is long-term investments that you are looking at, then there is no justification for any panic reaction to the market crash. “There is nothing abnormal about what is happening this time. The market will pick up later. Investors can learn from the experience that comes with losing money and can be better prepared next time,” feels Mr Mashruwala.

Typically, financial advisors recommend staying invested till the storm blows over, but adopting a clear strategy, that is, knowing what kind of funds could work for you can cushion the impact of the turbulence.

SIP a good bet

SIPs average the ups and downs of the equity market. Volatility in the market cannot mask the fact that equity delivers higher returns compared to most asset classes, but investors need to understand that this can happen only in the long term.

“If you did a one-year SIP last year, it would have no merit given the market downturn. If you do an SIP for at least five years, then you will experience the fruits of one entire equity cycle,” says Mr Jhaveri.

Adds Mr Mashruwala: “SIP can be a good bet for a common man in any market situation. You should go for a SIP in an equity fund if your goal is 7-9 years away.”

Stick to equity funds

The next aspect that you should consider is the kind of fund that would suit your needs. In a falling market situation, experts say, you should stick to diversified equity funds which are less riskier than sector-specific funds.

You can look at sector funds provided the top-five holdings belong to a renowned large-cap company. “Any day, a large-cap company will bounce back from its lows faster than mid-cap or small-cap companies.

So investing in a large-cap and/or a diversified equity fund will be a safer bet,” reckons Mr Jhaveri.

Large caps safer for a market novice

Mr Mashruwala seconds the view: “Large-caps are definitely safer, especially if you are a novice in the market. Such investors should stick to index constituents.

Index funds are the safest, followed by large-cap funds, mid-cap as well as small-cap and contrarian funds, thematic funds and sector funds — in that order.”

International funds could be a good form of diversification and gold funds can be considered too, he feels.

The Economic times dt. 14 7 2008