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Inflation is the sustained rise of overall price levels. Rising inflation is a real worry for the investors, as it chips away at real savings and investment returns. The effect of inflation is thus ‘deadly’ to the investment portfolios if not constructed well to beat the inflation. The impact of inflation to any investment portfolio depends on the instruments used to construct the portfolio. To defend inflation effectively, the portfolio should have constructed efficiently with the instruments that can defend inflation to a great level. Here are some tips on how to build an investment portfolio that would be able to protect the investments from inflation.
How inflation affect the portfolios:
Investors who have major chunk of money invested to the Bank Fixed deposit would be get affected by the cut of interest rates by the banks. Fixed deposits thus comes meaningless to those have put their money on it.
Fixed income products do not have the ability to beat inflation. When inflation raises, the returns from the fixed income investments come closer to the rate of inflation and thus those returns comes as totally meaningless. Whenever inflation is on picture, fixed income investments going to get the hardest hits.
Bond investment also cannot be considered as a suitable investments at the time of inflation due to the fixed interest rates of bonds. Due to this fixed nature, bonds would not be able to deliver inflation adjusted returns to the investors. Suppose an investor buys a five-year bond with a principal value of $100. If the rate of inflation is 3% annually, the value of the principal adjusted for inflation will sink to about $86 over the five-year term of the bond. A series of small and unanticipated increases to the general price level would significantly erode the real value of savings over time. It will also affect the buying power and increase the cost of running a business.
How to Beat Inflation? Investments that beat inflation.
There are number of investments that can be added to the portfolio to act as a cushion against inflation. Below mentioned investments have proven the best in category and to include in your portfolio to get required results for long time.
1. Equities or Stock investments
Historical data shows investment in equities are one of the best option to beat inflation. Investing to stock especially growth stocks can be able to provide inflation risk adjusted returns to you investments. Investment in equities can be done through direct investing or through investing in diversified mutual funds. However, there are no particular stocks or sector which will offer you complete protection from inflation.
Diversification amongst various cap stocks like large cap, mid cap and small caps that have thoroughly analyzed and picked from various sectors considers as the best method to beat inflation. However, this would make wonders to the investors if the investment duration is longtime i.e. 10 years or more.
2. Gold investments
Gold is incredibly famous on its superb capacity to hedge against inflation. The reason behind is the steady increases of its prices over the years in long time. An investment portfolio should contain 10 to 15 percentage investments in gold or gold related investment instruments such as Gold ETFs, Gold Mutual Funds and even investments in best of the bests gold companies both locally and internationally.
3. Real Estate investments
Real estate investments are considering the best available hedge against inflation today. Buying a or two houses, plots, commercial spaces, investing in real estate mutual funds, Real Estate Investment Trusts (REIT’s) all can be considered as investments in real estates. It is recommended to have 30 percentage of your portfolio with real estate investments. More than 30 percentage is not advisable. Investment in real estate with growing areas such as 2 tier cities is an excellent option for today’s investors. Having farm houses, farm lands also a best bet on real estate.
Real estate investments proven that a wise investments in the sense of provided superior returns in the past years by appreciating fast and steadily. It can be useful either way, getting rental returns as well as selling to huge profits. However, it would be advisable to not invest in properties that have huge maintenance charges regularly like apartments with communities and societies.
4. International stocks
Diversifying your portfolio by including stocks from international market is another available option to protect your investment portfolio from inflation. This is of course an excellent option for both retain and big investors. Investors have option to purchase international stock directly or through subscribing mutual funds that dominantly investing in international markets. Through this you are spanning your risk across countries than a particular sector or nation.
5. Global Mutual Funds
As a final point in this article, it is advisable for investors to look after specific mutual fund that investing in international real estate market, international commodities as well as international stock markets.
By adding the right mix of right investments to your portfolio, you can protect your investments to a great extend. This would help you to span your risk across various instruments and inside instruments, various sectors, nations and asset classes.
Sherin Dev , authored this article, is the Editor of Investinternals.com (this blog) and MoneywithMoney.net blogs..