In the year 1990 Petrol price were Rs.9 per liter and now in the year 2011 it is Rs.71 per liter. Fifteen years ago, a loaf of bread cost you about Rs.8; today it is around Rs.25. Similarly, as kids, you were able to get around 10 candies in Rs.1; today, you will get one candy for Rs.1 This is nothing but inflation on at work. According to Bloomberg data, from around 4% in 2001, inflation is now at above 9% levels.
Through the bite is not so sharp while you are still working, thanks to annual increments, you would feel the sting when you retire or when it’s time to cash in on your long-term savings if you haven’t chosen the right avenues. Here are four productions that will help you keep pace with inflation in the long run and will together give the much-needed stability to your portfolio.
The first soldier in the army fighting inflation is of course equity. Sample this: in 2001, the Sensex was at 3,000 levels, in 2011, it is at 19,000 levels, a compounded annual growth rate of as much as 18% on average. ‘You can either enter the stock market directly or through the mutual fund route. Invest directly only if you understand markets well. If you do not have the time or the expertise to select good stocks and analyses them, then it is always advisable to route your money in equities through a reputed mutual fund. The fund manager has both skills and size on his side and it’s his fulltime vocation so he will ensure the best for your investments.
As a long-term investor who is not looking for quick profits in the market, you should bear in mind that the stocks you pick should be fundamentally sound. While choosing stocks, you have to ensure healthy financial as well as other factors such as scope for the industry and management of the company. But not everyone can do their own as it involves a lot of research.
Equity investments work best in the long run. Through they are mostly liquid; it is risky to withdraw in the short term. To make the most of equity instruments, remain invested for at least 10 years. Any investment in equity takes at least 10 years to mature and grow to give you full benefits so it is only fair you give it that time.
Another important aspect to remember is to shift funds to safer instruments as your goal nears and not market fluctuation erode its value. Ideally should begin transferring the funds from equity to debt about two years in advance and this transfer should be completed over a period of a year.
India is one of the largest consumers of gold. According to gold Demand Trends for 2010 published by the World Gold Council, India was the strongest growth market in 2010 globally. Essentially gold prices are going up due to speculation and instability. It does not have any industrial user and is unlikely to become extinct so we don’t really know what will happen, but you can have some gold in your portfolio as a hedge.
Over the years, due to its intrinsic value, gold has appreciated enough to keep pace with inflation. For instance, according to Capitalized, from Rs.4,225 per 10g on 2 April 2001, gold has risen to Rs.20,805 per10g as on 1 April2011, an increase of almost 17.28% on a cumulative basis.
In all probability, gold would already be a part of your portfolio and there is merit in doing so. But what you need to be careful about is whether it is in the right form and proportion. Ideally not more than 10% of your portfolio should be in gold; in fact even 5% could be more than enough, The best way to invest in gold is through gold ex-change-trade funds(ETFs) or gold mutual fund. They are convenient, cheaper and there is no risk of loss or theft associated with physical gold. In case of physical gold you will have to bear the short-term capital gains tax up to three years, the quality may not be assured and there is emotional attachment, too.
A traditionally popular avenue to beat inflation, investment in real estate can be done through commercial, residential properties, land or real estate investment funds. Real estate has all kinds of risks associated with it, but it has it’s own advantages also. Leasing out your property can give you a steady flow of income. Some like to set it aside for a fixed purpose such as children’s wedding.
However, there are certain factors you must consider before investing in real estate. It is not a liquid asset – there is a lot of paperwork involved and getting the right price and location may take time. Besides, there are various recurring expenses such as property tax, maintenance, deemed tenants and periodic renovation. If you sell it, then depending on how you use and invest the proceeds you may have to bear the capital gains tax as well. Moreover, in the largely unregulated market in India, cases of fraud and title dispute are pretty common.
However, despite all this, it remains a preferred investment and if chosen well, can protect the value of your asset from inflation due to capital appreciation. Some people are absolutely wary of equity and to them real estate feels like a lot safer avenue. They have a level of comfort with it, so we let them go ahead with it. But depending on their situation and risk profile, the exposure to real estate could be anything between 20-40%.
Although equity is the best and probably the only avenue to beat inflation in the long run, it is volatile. Similarly, gold prices depend on several macro factors, while real estate is extremely illiquid.
To provide stability to your portfolio, you need to park some funds in a debt instrument, too. In debt basket, provident funds are capable of remaining abreast with inflation. For the current year, Employees, Provident Fund’s 9.5% rate makes it more attractive than it already was. Public Provident Fund (PPF) gives 8% per annum. The best part is the returns are tax-free in both the instruments. Out of every Rs.100 you put away for your long-term goals, Rs.70-80 has to go in equity, the rest can be distributed other asset classes. It is advisable to open a PPF account and exhaust its limit. Which other debt instrument can give you a guaranteed tax-free return as high as 8%?”
Equities is clearly your best bet if you don’t want to cut down the size or downgrade the price tags of yours goals and targets, but remember to shift your money to debt products once you come close to your goals. In case you are anxious about putting all your money in equities, there are other avenues as well. Ideally your order of preference should be Equity, followed by PPF, some Gold and finally Real Estate. Lock money in real estate only if other avenues are estate only if other avenues are secure and strong.”
While saving is important, making it inflation-proof is equally so.