Inflation reduces the value of money. As the prices of services and products rise in the economy during inflation, it invariably reduces the consumers’ power to buy. People save for the future with the aim to have more disposable income or purchasing power in the long term. However, if the investments of a person are not inflation adjusted, then inflation can eat into their savings. Hence, as per Kavan Choksi Professional Investor, exploring ways to beat the impact of inflation on investments is extremely important.
Kavan Choksi Professional Investor underlines tips that can lower the impact of inflation on investment portfolio
The impact of inflation on investment is two-pronged. Firstly, it eats into the savings of a person, and secondly, inflation lowers the real returns on investment if the returns are not adjusted for the price rise. Hence, if an investor aims to maintain or increase their wealth, they need to be proactive about investing in assets that can grow faster than inflation.
Here are a few tips investors may follow to beat the impact of inflation on their investment portfolio:
- Diversify the portfolio: Diversification is among the most vital principles of investing. It basically implies to the practice of spreading investments across various types of assets, ranging from cash and commodities, to real estate, bonds and stocks. Investment diversification reduces the exposure of an investor to any single market or sector, as well as allows them to balance their risks and returns. By effectively diversifying their portfolio, investors can benefit from the growth potential of certain assets, while also staying protected from the volatility or decline of others.
- Consider real estate: Real estate is an advantageous asset class that may help in beating inflation, as it tends to appreciate in value over time and generate rental income. As property value and rent prices go up along with the cost of living, real estate may even act as a hedge against inflation. However, investors must understand that real estate is not a very liquid asset. This basically means that is it not easy to sell or buy, as well as may incur maintenance and management expenses. To avoid such hassles, it would be prudent to purchase shares of a real estate investment trust (REIT), which is a company that owns and operates a portfolio of properties.
- Explore commodities: Commodities like metals, oil, grains, gold and so on, are traded on global markets. When the demand for these commodities exceeds the supply, or when the value of money goes down, the prices of commodities surge. Hence, they can often help investors to beat inflation. Commodities like gold also act as a store of value, and are often considered to be a safe haven in times of uncertainty or crisis. People may choose to invest in commodities directly, such as buying physical goods or futures contracts, or they can make indirect investments by purchasing shares of a commodity-related company or fund.
As per Kavan Choksi Professional Investor, adjusting bond strategies as per the market trends would also help investors to lower the risk associated with inflation. It would be prudent for investors to purchase shorter-term bonds that are less sensitive to interest rate changes, or inflation-linked bonds that adjust their interest and principal payments as per the inflation rate.
