Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

HEDGING AGAINST INFLATION

Some smart strategies for preserving and enhancing the all-important purchasing power of your Rupee!

HOW 7% ANNUAL INFLATION CAN IMPACT YOU?

After   Number of Years

5

10

15

20

25

30

Effective Value of   Present Rs.100

71

51

36

26

18

13

Earnings Required   for Present Rs.100

140

197

276

387

543

761

As someone once rightly remarked, “Inflation is when you pay fifty rupees for the twenty rupees haircut you used to get for ten rupees when you had hair.” When the value of the rupee erodes over the years due to inflation, the same quantum of money now fetches you fewer goods or services. That is why that haircut does not cost the same as it did a few years ago!

Inflation may appear tame in the short term, but its effects sneak up on you after a long period of time (like grey hair and extra pounds). Just imagine what can happen with the purchasing power of the rupee eroding with the time! 15 years from now, if inflation averages the current annual rate of 7% per annum, you will have lost 64% of the purchasing power of your capital. Thus, to maintain a lifestyle equivalent to Rs.1,00,000 as of today, after 15 years you will need a corresponding amount of Rs.2,76,000.

 As an investor you must, therefore, look through this money illusion and focus on preserving and enhancing the all-important purchasing power of your rupee. And along with inflation, you must also account for the impact of income tax which eats away your actual earnings. Say for example, you are earning 8% interest per annum on your bank deposit. If you are a taxpayer in the bracket of 30.9%, your post-tax rate of interest works out to 5.528% and considering the inflation rate of 7%, your effective capital growth is in the negative (-1.472%).

So how do you insure yourself from inflation for the long term? Here are seven smart investment strategies that can be practiced to beat inflation:

#1 Buy your House in Time!

Buying a home is probably one of the single biggest investments you make in your lifetime. The sooner you make the decision, the better. Remember that everything keeps on appreciating except the value of the rupee. If you buy the house you need in time, you are automatically hedged against inflation. Don’t you realize that a house costing Rs.60,00,000 today could have been very well purchased by you 10 years ago for only Rs.12,00,000? If you had then parked this money into a deposit fetching you 9% interest per annum (net of tax), even compounded quarterly, your investment would have grown around two and a half times in 10 years to Rs.30,00,000, but you would still be now required to dish out an extra Rs.30,00,000 just for delaying your decision.

 #2 Be a Real Estate Landlord!

If you invest in real estate today and become a landlord, you’ll be happy to know that rents are subject to inflationary pressures as well. You have the capability to raise your rental earnings when the cost of living goes up everywhere.

#3 Build your Earning Power!

A strategic way to battle inflation is to keep your income stream going. Be part of an employment where salaries offered are sensitive to inflationary trends. If you own a business or profession, your comfort level should be higher since you can always raise rates, fees, prices along with the costs of operating your business or profession. The real squeeze of inflation is suffered by the fixed income earners, only dependent on investment income. If you fall in this category, you must become a smart investor reaping effective yields that can beat inflation.

#4 Look out for Higher Interest!

When there are inflationary concerns, it may be best to keep your money in shorter term deposits where you don’t lock in rates for very long terms. This is because higher inflation rates are soon followed by higher interest rates as well. Keep your options open at this time.

 #5 Diversify into Equities and Mutual Funds!

If you are a serious investor, stocks and equities should hold a great appeal from the viewpoint of their ability to effectively counter inflation and give you superior real returns over the long-term vis-à-vis any other asset class. This is a fact attested to by several studies. However, realizing that building an individual stock portfolio also carries its own risk, you may wish to mitigate the same through planned investment in units of diversified equity funds or balanced mutual funds, also packaging a small amount of your portfolio to inflationary hedge funds focusing on metals, commodities and real estate.

#6 Investing in Bullion

How about Bullion that is gold and silver? Gold has always earned high respect as a ‘crisis hedge.’  You can invest in gold through avenues not just as bullion, coins or jewellery, but also through units of gold trading mutual funds, popularly referred to as ETFs.

 #7 Plan your spending!

This should be the simplest advice but may be the hardest to follow. Think twice before you buy anything. Or learn the art of smarter buying, so that you make the best bargains for your purchases by planning your time and place for the same.

Leave a Reply

You must be logged in to post a comment.

Powered by Epaperz.com | Hosted at HostADomainNow.com