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Here's how to profit from rising inflation

Last updated on: April 6, 2011 16:43 IST

Here's how to profit from rising inflation

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When inflation rises the value of our money diminishes, all essential commodities become dearer. In fact high interest rates impact our loans and make them costlier. This erodes into our monthly savings in the long term. However, you can hone your money management skills in such a way that it does not have an adverse effect when inflation soars.

Rising inflation might just provide investors the opportunity to earn some extra money!

While volatile stock markets will give value hunters an opportunity to identify the right stocks for the next three years or more, investment in fixed deposits, short-term bonds or funds and gold might be a good investment option for the short term.

In the current scenario one can look at a portfolio ratio of 60-30-10 in equity, debt and gold, respectively.

In his Budget proposals for 2010-11, Finance Minister Pranab Mukherjee has indicated that inflation still remains a concern so it is highly likely that India may continue to adopt measures to tighten its Monetary Policy in the future as well, apart from the recent hike, leading to a high interest rate scenario.

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Photographs: Uttam Ghosh/Rediff.com
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Choose the right mutual fund

Debt Funds

When interest rates rise following inflationary pressure they have a catalytic effect on debt instruments and the best and safe way of investing in them is through debt mutual funds.

In the last six months debt funds have overshadowed their equity counterparts.  

While equity large cap funds gave an average return of negative 0.5%, its debt counterparts seem to have outdid them in the short term.

Fixed Maturity Plan

3.53%

Provides safe returns
Good for short-term investment

Liquid

3.43%

Very short tenure of investment

Invest in money markets

Ultra Short term

3.46%

Invest in short-term bonds maturing in a year

Riskier than liquid funds but give better returns

Gilt Medium & Long Term

3.01%

Given good results when interest rates are falling

Income

2.55%

Has a fixed maturity value

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Photographs: Uttam Ghosh/Rediff.com
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Here's how to profit from rising inflation

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Commodity Funds

Commodity-centric mutual funds could be used as a proxy for investment as they are well placed to benefit from the demand supply gap. Such funds usually investment in commodities like gold, silver, food products and metals

Some examples are Mirae Asset Global Commodity stocks, ING OptiMix Global Commodities, Birla Sun Life Commodity Equities, SBI Magnum Comma, AIG World Gold and DSP BR World Gold.

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Photographs: Uttam Ghosh/Rediff.com
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Here's how to profit from rising inflation

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Gold/Silver

For centuries gold has been considered the best form of investment. From kings to potters, everyone bought gold and treasured it all their life. Till date the yellow metal continues to shine.

In times of recession, gold has been the safest bet, surging to all-time highs when all other instruments plunged.

Although other commodities depend on the demand-supply gap, the movement of gold depends on relative value of currencies as it is regarded as a currency in many countries.  

Gold is especially sensitive to fluctuations in the value of the dollar. As the dollar goes down international gold prices go up, and as the dollar goes up gold prices tumble.

Other factors that influence gold tags are oil prices. Also, Indian gold demand is supported by cultural and religious traditions which are not directly linked to global economic trends.

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Photographs: Reuters
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Here's how to profit from rising inflation

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Silver prices too have also risen by approximately 90 per cent in the last eight months. Gold in return gave 20 per cent during the same period; whereas Sensex saw a rise of 9 per cent and midcap indices fell by 1.5 per cent last year.

Silver has outperformed gold for the past few months and is likely to give better returns in the coming few months as compared to gold. Silver prices are expected to enhance by 20-25 per cent in the coming year.

The manner in which you invest in gold is very important. It can be in physical form or through funds. Investing in gold through jewellery, which you might want to sell later on, will not make sense from an investment perspective, as when you sell your gold ornaments the value goes down by 30 per cent due to making charges.

The best way to buy physical gold is through bars or coins else one can always invest in gold exchange traded funds.

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Photographs: Reuters
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Oil

Following the turmoil in the Arab world, oil prices are on the boil. So investment in oil itself can be a good hedge against inflation. Owning oil is a great play on the growth in India and China and looks to be a trend with many years left in it.

With some smart planning you can obtain good returns in these times. Your portfolio needs to be reallocated according to the changing market conditions.

However, on the flip side, to see the best returns in equity it is also important to stay invested for the long term, the more number of years the better and not withdraw funds at the first sign of a dip in value.


Photographs: Reuters
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