Investment strategies to reduce the impact of inflation

Inflation refers to the gradual price increase for items or services as they age. Reducing the impact of inflation is important when you plan your investments.

The terms inflation denotes the gradual price increase for the commodities or services as they age. In the current environment, inflation is the most common term on everyone’s mind. The crude oil prices have crossed $120 per barrel, and everyone is feeling the impact of inflation. The Indian government is expected to pass on the price increase soon. The investments that you plan should be as per the inflationary environment. 

If there are problems in the market, it is best to take action based on your knowledge. It’s tedious; however, it’s usually the best option. The asset allocation strategy is effective because it’s designed to endure all market conditions. However, just because that’s the right thing to do does not mean that investors should follow the advice. What investors need to do in an inflationary scenario is to tweak their portfolio so as to reduce the impact of inflation or even profit from it. 

There are some actions investors can take right now to ease their tension about inflation and minimise the effect on their portfolios. Investors need to tweak their portfolios to hedge against inflation or even profit from inflation.

Also Read: How to Diversify Your Portfolio Like An Expert

Take a run towards equities, and get away from cash

From the many choices investors must take to fight inflation, maybe the best suggestion is the simplest to follow. Keep investing in equity.

It’s simple and practical guidance. If a company is facing increasing costs, it can offset these by increasing prices, which increases the revenue and earnings. It’s a win-win situation for the business and the investor. It’s an ideal hedge against inflation and works well in an asset-allocation plan.

Investors who are worried about the threat of inflation might want to allocate some more percentage in their investment portfolios to equity investments in order to combat the fears. Remember, we’ve said that this period of inflation is only temporary, and when prices begin to stabilise, the investors should reduce this excessive allocation.

Consider investing in gold

Gold is an ideal hedge against inflation and declining currency. Gold has been historically used as an inflation hedge, and during times of high inflation, gold tends to outperform the other asset classes. It would be best if you increase your allocation to gold investment during bouts of high inflation. 

Also Read: Should You Resort To Gold During Inflation?

Reduce exposure to debt

In times of high inflation, the debt funds seem to underperform the market as the debt funds have fixed locked-in interest rates, whereas the inflation is higher than the interest rates. Also, during high inflation times, the Central bank might increase interest rates, impacting the returns from debt funds.

Commodity funds

Commodity funds invest in a basket of commodities. In a high inflationary scenario, the price of commodities is rising, so why not invest directly in commodities via commodity funds. Natural resources funds are a good option to reduce the impact of inflation.

Conclusion

The correct asset allocation strategy can help you face the threat imposed by inflation. The portfolio should be balanced such that inflation does not impact your purchasing power. You should remember that high inflation is not permanent, and when the inflation finally reduces, you should rebalance your portfolio as per your needs.