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Rising inflation and negative return on assets

I was reading through a report of Sharekhan which said that the inflation for the month of January 2010 stood at 8.56%, whereas the 10 year yield on G-Sec stood at 7.90%. Going by these numbers, the interest income I earn on the deposit is lower than the inflation. That is, I am losing money as I earn!!! For that matter, the inflation percentage quoted is that of Wholesale price index and we all know where the consumer prices are going. A typical example, we bought rice at Rs35 per kg yesterday as against Rs22 a year ago. It is more than 50% inflation. Now with the recent increase in the Petrol and diesel prices after the budget and the proposed removal of subsidy on the fertilizer prices, the prices of essential commodities are going to go only one way, up!! We need to learn to live with higher inflation.

The rising inflation makes me shudder what would happen to savings and the retirement corpus. Would fixed deposits and bonds help you in retaining the value of your savings? The answer is a clear no. We need to identify avenues where you can deploy your money and where the returns outpace the inflation? Are there any asset classes which can help you do that? Yes, the obvious answer emerged is to invest in equities and real estate from an individual perspective. The other option would be park a limited portion of the funds in Gold, as a store of value. Remember, Equities, real estate and Gold, as asset classes have their own inherent risks.

So how would these asset classes help in beating inflation? In case of equities, if the rising price levels are to continue, the sales and profits of the listed companies should also improve in that proportion and the share market should reward these companies in the form of capital appreciation. Historically that has been case. But the fact of the matter is finding high quality equity which would continue to grow and deliver for you. You always get a feeling that equities have been fairly priced and there is no room for further appreciation. You don’t know when to invest. Take the case of current global economic scenario. It is definitely not that encouraging. The in-famous SPIG (Spain, Portugal, Ireland and Greece) countries are facing default threat on their sovereign debt. If that happens there would be definitely another round of sell-off across asset classes in the world markets. When would that happen or would it not happen? Nobody has a clear idea about this. From past data and it has been seen that there is no better way than investing in a systematic manner. To put it simply, keep investing a fixed amount every month in equities either directly or through Mutual Funds. It would take care of the rising or falling trends in the market place and even out in the longer time horizon.

Looking at the Real estate, with rapid urbanization it would be worthwhile to invest in plots though it is very tedious and time consuming process. You have to identify a location and then keep looking for good properties. It also involves a high percentage of cash transactions (particularly for land transactions) which makes all the more difficult for the salaried class. But what I have seen is that real estate prices have held their own, at least to a limited extent, even in the worst of times. I am not talking about highly priced flats. So the best way forward is to start investing in equity in a Systematic manner either through Mutual Funds or buying high quality individual stocks. Real Estate should be the next best option, if you have the time, money and energy to scout for good properties. Add a flavor of gold (in the form ETF’s) to your portfolio and you are relatively well-placed to face the inflation.


Anand said...

Karthik, gr8 article explained in lay man terms!
Found it really useful, Thanks, Anand

Venkat Muthukrishnan said...


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