How To Invest During High Inflation

Key Highlights

• Inflation is the decrease in purchasing power due to rising prices of goods and services, impacting money's real value.

• India's Reserve Bank measures inflation.

• It is generally considered harmful to have high inflation, however, some economists believe that a small amount of inflation is beneficial.

• Inflation can have positive effects, such as easier access to loans, the establishment of a framework for implementing monetary policies, and the prevention of deflation.

• Stocks are considered the best high inflation investment, as rising prices lead to increased company profits.

• The best way to hedge against inflation is to invest in commodities such as gold real estate and select stocks and bonds.

What is Inflation?

Inflation is the gradual decrease in the purchasing power of money. With the increase in the general price of goods and services in the economy, fewer items will be available for every unit of money.

For example, with Rs 100, you can't buy as much as you would ten years ago. During the last ten years, Rs 100's purchasing power has declined, and the cost of goods has increased. The effects of inflation can be negative, but most economists agree that moderate inflation is beneficial. The positive effects of it indicate a healthy economy. Such as:

• Reduced unemployment due to rigid minimum wages
• Easy to obtain loans
• Establishes a framework for implementing monetary policies
• Prevents deflation

Impact of Inflation on Different Asset Classes

For the right high inflation investment idea, you need to understand how different assets behave when inflation is present.

1. Fixed-rate Savings

Fixed-rate investments with long maturity periods are more susceptible to inflation than those with short maturity periods since inflation compounds over time. Inflation devalues both interest rate repayments and principal repayments.

2. Commodities

When inflation rises, commodity prices appreciate, providing better hedging opportunities. Precious metals such as gold and silver offer protection against inflation. During inflation, the prices of other commodities, such as raw materials, agricultural products, and real estate, also increase.

3. Real Estate

The real estate market has performed exceptionally well during periods of high inflation in the past. It is possible for investors to invest in this asset class by purchasing physical assets or by purchasing REITs (Real estate investment trusts).

4. Bonds

A hyperinflation situation is a time when inflation-indexed bonds with variable interest rates are preferred over fixed-interest rate bonds. Consumer Price Index-linked bonds are a better inflation hedge.

5. Stocks

There is no other asset class that provides better inflation-adjusted returns than stocks. During inflation, companies like consumer staples pass the higher input cost onto consumers, resulting in increased profits.

How to Invest During High Inflation?

When a tough time is approaching, investors prepare to protect their money. In times of inflation, high inflation investment strategies should be carefully evaluated, considering all options.

The Best Investments are Stocks

Over the years, stocks have proven to be the best hedge against inflation. As a result of inflation, the price of a company's goods increases, resulting in higher revenue and profits. This is a win-win situation for the company and its investors. Over time, equity investments help investors build wealth and increase their purchasing power.

Floating over Fixed

Fixed-rate investments offer stability, but their returns can't keep up with inflation in a situation like this. Therefore, a floating rate is preferable. As inflation rises, loans become more expensive, and floating rate bonds become more expensive. Portfolio allocation towards floating-rate investments is the best high inflation investment idea that can help investors beat inflation's adverse effects.

Hedge with Commodities

Inflation usually increases commodity prices in the economy. Several commodities are effective hedges against inflation, such as real estate, gold, metal, stocks, and bonds. You can ease inflation anxiety by allocating some of your portfolio to goods.

Conclusion

People are affected by inflation in different ways due to its long-term socioeconomic nature. However, over time, various market strategies have been developed to beat inflation. Moreover, investing in a volatile market during inflation exposes you to more risk. Thus, it is important to make calculated decisions during inflation. If you invest in the high inflation investments listed above, you can reduce your risk.