RISING INFLATION

Rising inflation is one of the biggest stories of recent weeks and has received a great deal of attention from the media and political parties. At the same time, inflation is an economic problem that the average person meets on a daily basis in terms of higher prices; particularly of food products.

Ask yourself the following questions:
- Is inflation affecting you? How?
- Is the recent increase in prices of essential goods of daily use affecting you? By how much have your monthly budgets increased compared to what you spent last March-April?
- Have you stopped/reduced the number of social outings in a month with your friends/family/spouse because it costs you more now?
While generally speaking, inflation means a general rise in the level of prices, the textbook definition says inflation reflects the situation where the demand for goods far exceeds the supply of goods.
Simply put: What you could buy for Rs 100 today, you will have to pay Rs 103 for the same, if inflation increases at the rate of 3 per cent. This might sound small right now but after a few years, this is capable of eroding your capital.
The value of Rs 100 in your wallet was not the same as it was the previous year.
How it has affected us:

Food prices are soaring
All essential items like vegetables, oil, milk, sugar are getting costlier
Rentals and real estate rates have almost doubled in just a few months in most cities
The real estate prices are at record highs, making life miserable, especially for people who have migrated to cities for jobs
Action plan for combating inflation
What is the right investment portfolio that beats inflation and also gives you good returns?

Some allocation to debt. Even in today’s high-inflation environment, one should stick to the basic principles of investment. Adopt a long-term investment horizon and ensure safety of capital. To safeguard capital, continue to invest some amount in fixed-income instruments.

Increased allocation to equity. But in today’s high-inflation environment, if you invest too much in debt the strategy could backfire. Since returns from fixed-income securities are negative when you factor in inflation, a larger chunk of your investment should be invested in equities. Equity exposure is a must to beat inflation.

In the light of the current high level of inflation, you could tweak your asset allocation—by slightly increasing your exposure to equity.


Invest in gold. Gold as an investment class has done very well over the last one year. Not only has it beaten inflation, the returns from gold exchange traded funds (ETFs) is equal to that from the Sensex. According to Delhi-based Surya Bhatia, “Gold acts as a hedging tool. It gives good returns when the economic outlook turns negative. If the current global turbulence continues, gold could do well in the coming year as well.” Bhatia suggests allocating 10-15 per cent of your portfolio to gold.
Make your investments work harder. Finally, do not allow money to lie idle. As Bhatia says: “Keeping money in a bank’s savings account does not help at all but depreciates your investments.” So keep the minimum in your savings bank account and invest the rest in a variety of instruments, depending on your liquidity needs: liquid funds for six months; fixed maturity plans for six months to two years; short-term plans of debt funds for two to three years; and equity funds for longer periods.


Living as we do in the world’s second-fastest growing economy, we will have to get accustomed to a high level of inflation. The only way we can beat inflation is by participating in India’s growth story, and that means investing in equity, the current downturn and volatility notwithstanding.