India’s retail inflation spiked up to 6.26% in the month of June 2021 from 4.23% in April and 6.30% in May 2021, as per data released by the Government recently (Source: Ministry of Statistics and Programme Implementation, Government of India, 13.07.2021). The spike in inflation is attributed to higher international crude price and food prices, particularly edible oil prices. Despite rising inflation, the Nifty rose 6.5% in May 2021 and further 0.9% in the month of June closing the month near all- time high of 15,722 (as on 30th June 2021). In this blog post, we will discuss how you should invest, so that inflation does not erode your wealth.
Many investors ask why I should invest in equities, they feel equities are risky. Well equities are not risky but equities are volatile and fixed income instruments are risky because inflation reduces the purchasing power of money. Inflation is a critical factor in investment planning. As mentioned earlier, one should understand the real return (Return – Inflation) of an investment to ensure that your invested money earns a return which is sufficient to take care of the rising prices. Therefore if your investment returns are higher than inflation over a sufficiently long investment horizon you create wealth to fulfill different financial goals. If your investment returns cannot keep pace with inflation on a post tax basis, you may not be able to meet your long term financial goals.
Next things is I don’t have time and knowledge to do sufficient research, well then the investors should choose open ended equity schemes of Mutual Funds. Systematic Investment Plans (SIP) in equity mutual fund schemes are well suited for long term investments because you can invest from your regular savings and invest over a long investment horizon. Over long investment horizons SIPs can reap the power of compounding in creating wealth for you. SIPs are especially suited for investment in inflationary environment because they can take advantage of market volatility. If the equity market is volatile in the short term for some reason e.g. US Fed increasing interest rates, crude prices going up etc, you can take advantage of market volatility through Rupee Cost Averaging because you invest at different price points in SIPs.
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