Inflation is a “Silent Wealth killer” that kills the purchasing power of money. Purchasing power indicates how many goods or services you can buy in an amount. When inflation increases, the purchasing power of money reduces which means you can buy only fewer things from a particular amount.
Inflation is a standard part of the economic cycle, but if left unchecked, it can wipe off your savings and investments, leading to unstable financial situations.
If you are a regular investor, you must know the inflation protection strategies to adopt. Let’s learn about it in detail.
What is Inflation and How does it affect Investment?
Inflation is the situation when the prices of goods and services increase while reducing the purchasing power. It is usually measured by indices such as the customer price Index. Etc. As per experts, moderate inflation is 2% to maintain a healthy economy. If inflation increases, it can lead to financial stress.
For example, if you have Rs. 10,000 today and inflation is 5% yearly, Next year, purchasing power of Rs. 10,000 will be Rs. Rs. 9500. It may seem to be a slight difference, but over the years it has become a major issue. The impact of inflation on different asset classes is as follows:
| Asset class | Effects of Inflation |
| Cash / Savings account | Negative effects |
| Bonds (Fixed income) | Negative effects |
| Stocks (Equities ) | Mixed |
| Real Estate | Positive |
| Commodities | Positive |
Read more: Best Investment Plans for Beginners
Investment Strategies Against Inflation
Learning inflation-proof investments is the only way to surpass the inflation relation problems and safeguard the investment. Here are some investment strategies against inflation that you can adopt:
1. Stock Investment (Equities)
Equities are considered the best investment option to surpass inflation in the long term. Companies with strong pricing power such as the utility sector or consumer staples sectors can sell their product at increased cost without losing the demand Investors should invest in diversified index funds or Exchange-traded funds to lower the risk and offer market average returns. It helps the investors to beat inflation and protect the investment from the bad effects of inflation.
2. Real Estate Investment
Real investment is also one of the most suitable options for investment to safeguard from inflation. The value of property always increases with inflation, rental income also increases with inflation, and mortgages with fixed interest rates reduce with increasing inflation. All these factors make it an inflation-proof investment. Investing in real estate directly or indirectly through real estate investment Trusts can offer you liquidity and diversification.
3. Commodities Investment
As a smart investor, you must invest in commodities such as gold, oil, or agricultural products. Prices of these products always increase with rising inflation. Gold is especially considered as the “Safe Haven” as its intrinsic value remains unchanged even if the value of currency decreases. Some of the best commodity investments are gold coins, bullions, ETFs, and future contracts.
4. International Diversification of Investment
Inflation does not remain the same in all the countries, it can differ from one country to another. So, you must invest in international stocks and bonds which allow you to tap into economies having lower inflation and stronger currencies. Emerging markets usually offer higher potential growth but increased inflation-related risks.
5. Invest in Inflation- Resistant Sectors
To overcome the bad effects of inflation, you must invest in the sectors that as inflation-resistant:
| Sectors | How it beat inflation |
| Consumer Staples | This sector maintains a steady demand |
| Utilities | The regular billing cycles in the utilities sector allow price adjustments. |
| Energy | Increasing prices of Oil and Gas surpass the inflation easily. |
| Healthcare | Healthcare industry demand never decreases with rising inflation as it is a basic need. |
Read more: How to Plan Your Investments Until Retirement
Conclusion
Inflation is not a controllable aspect but adopting the right inflation protection strategies can secure your investment. It allows you to maintain or grow the purchasing power of your money. The main strategies include diversification, investment in inflation-resistant sectors, real estate, and commodity investment. You must also understand the effect of inflation in each sector before investing. Analyzing the long-term perspective and adjusting your investment strategies can help you easily face the inflation challenge and make your wealth stronger.
FAQs
What are the best inflation-proof investment options?
Ans. You cannot measure all the options with the same scale, but as per the historical data, assets such as stocks, real estate, gold, oil, etc usually perform very well during inflation. You can diversify your investment across multiple inflation-resistant assets.
What is the effect of inflation on savings accounts and fixed deposits?
Ans. As savings accounts and FDs offer lower interest rates, the rising inflation overpowers the interest earned which decreases the value of your money. For example, if you are earning a 3% interest rate on your FD, but the inflation is 6%, your return becomes -3%.
Are stocks good investments against inflation?
Ans. Yes, sticks can be good options to beat inflation. Various companies can increase their prices as per increasing inflation without affecting the demand. However, all stocks do not perform well. You must diversify your investment across consumer staples, energy, and utilities.
Can I invest in Gold during inflation?
Ans. Yes, Gold investment is one of the best options to invest during inflation. Its intrinsic value remains unchanged. The value usually remains the same or increases during inflation. However, you must always diversify your investment because gold prices can be volatile sometimes.
What Are the Effects of Rising Inflation on Cryptocurrencies?
Ans. Cryptocurrencies are highly volatile and speculative and their performance during inflation is never consistent. Investment in cryptocurrencies should be done carefully with proper risk management.
