Inflation refers to the rise in price of most daily use necessities over a period of time. This could include goods and services like food, clothing, housing, recreation, transport, consumer staples, etc. Inflation rate is measured in percentage and it denotes the decrease in the purchasing power of a unit of a country’s currency. While inflation can help boost expenditure and avoid hoarding of money, rising inflation rates can lead to a massive decrease in economic growth.
In India, inflation is measured based on the Consumer Price Index (CPI) and Wholesale Price Index (WPI). These measure the changes in rates paid by consumers and retailers for any particular good or service. The Ministry of Statistics and Programming Implementation measures inflation and the central government implements policies which help keep inflation in control.
In your personal life, you can follow some simple steps to help you keep up with the rate of inflation. Here’s how investing mutual funds can help you cope with inflation:
- Try SIP investment
A Systematic Investment Plan (SIP) is a method of investing in mutual funds which can help you deal with the effects of inflation. This method allows you to follow a disciplined approach to investing regularly over a period of time. You can start by investing a considerably small amount like INR 500 either monthly, quarterly, half-yearly, or yearly depending on your requirement.
Investing through SIPs also offers the benefit of compounding, which allows your investment to grow along with regular new installments. This investment method also encourages you to stay invested through different market cycles by buying more units when the prices are low and fewer units when the prices are high. This is known as the benefit of rupee cost averaging, and if you stay invested when the markets are down it can allow your investment value to grow whenever the markets recover.
- Don’t just save, invest
Saving your money might not be sufficient to deal with inflation. That’s why, you could consider investing in mutual funds and equity markets, which can potentially generate higher returns compared to a savings account in a bank.
On the other hand debt mutual funds might offer lower capital risk and can safeguard your invested capital. They are an option to invest in safer avenues for the short-term or mid-term.
- Diversify your portfolio
Dividing your investment between equity, debt and other asset classes can help you beat inflation. You might also want to create an investment portfolio which invests across markets, because each sector faces different rates of inflation over the years. A diversified investment could help balance your portfolio during tough times.
- Take a chance on gold
Investing in gold can be a good hedge for the long-term against inflation. Like most products that increase in price during inflation, gold prices tend to increase too. While you might not want to keep it as a major part of your portfolio, it can help diversify your investment. You can invest in gold electronically through Gold mutual funds or Gold ETFs without having to own any real gold.
- Re-balance your portfolio
To adjust your investments with the times, it might be a smart decision to re-balance your portfolio yearly. To identify any changes required in your portfolio you could take into account your financial goals, risk appetite and investment horizon. You can also invest in new trends or change your investment strategy based on any major market changes that you identify.
Apart from these mutual fund related investments tips, you can also consider certain steps you should take to protect your finances from inflation.
- Firstly, you should consider a re-look at your budget and cut down on any unnecessary expenses.
- Another tip you should remember is, inflation can hurt you more if you possess more cash possessions which could lose value rapidly. However, investments in real estate and other commodities can see their value grow.
Eventually, the way to deal with inflation is identifying an investment option that will be able to generate inflation-beating returns while also trying to secure your capital according to your risk appetite.
Article Shared by ICICI Mutual Fund