>Investment Strategy to beat inflation

The inflationary environment is continuing for more than 18 months now. The RBI, through its tightening of its monetary policy, has already increased the interest rate 13 times in the recent past. Inflationary expectations continue to be a challenge not only for policy makers but also for the common man who is struggling to retain his purchasing power, savings and return from investments. There are challenges for the investor in both finding means to earn a positive real rate of return from his investment and in identifying the asset class.


The risk-averse investor tends to invest in debt-related instruments like FDs etc over a period of time. This is because in absolute terms people see their savings grow but over time there is a reduction in the purchasing power due to inflation. With food inflation hovering in the zone of 16% and WPI around 8.5% even after change in the base year, it has become almost impossible to maintain the purchasing power. Fixed income debt instruments which provide returns in the range of 8-12% with moderate risk are currently giving negative real returns or in other words are not able to beat inflation (Investment return – inflation = real rate of return). Over and above this, the investor needs to pay income tax on income from investments thus suppressing the returns further. In such an inflationary environment, investors need to make investments where they can beat inflation. Hence, investors must allocate a sizable portion of their funds in assets such as equity which have proven in the past their potential to give positive returns even after inflation.


History has shown that equities have been the best investment class over any long-term period. However, most of the people you would have asked, especially retail investors, would have said that they have lost money in the stock market. Why is it so? Firstly, we need to understand that the market in the short run is a function of human sentiments rather than the fundamental value of the underlying companies. It is there where most of people lose out as they get carried away by other people’s mistakes. In the long term, the equity markets tend to mirror the economic growth of the economy but people tend to time the market, and that is where they lose out.


To read report in detail: INVESTMENT STRATEGY
RISH TRADER