Inflation means a rise in prices of goods and services over time. It is calculated by taking into consideration a set of goods and services, and then the prices of the items in that set are compared to prices one year ago. In India, inflation is measured based on the wholesale price index (WPI) which measures the change in prices of a selection of goods at wholesale rates.
Inflation gradually reduces the purchasing power of money, and therefore it becomes very important for investors to understand the impact of inflation on their investments.
Inflation means a rise in prices of goods and services over time. It is calculated by taking into consideration a set of goods and services, and then the prices of the items in that set are compared to prices one year ago.
In India, inflation is measured based on the wholesale price index (WPI) which measures the change in prices of a selection of goods at wholesale rates.
Inflation gradually reduces the purchasing power of money, and therefore it becomes very important for investors to understand the impact of inflation on their investments.
For example, if an investor deposits his money in a savings bank account which generates a return of 3.5 percent per annum, and inflation in the market is around seven percent, he is making a bad choice as his purchasing power is increasing by only 3.5 percent whereas prices of goods and services are increasing by seven percent.
The Reserve Bank of India (RBI), in consultation with the government, sets the target for the rate of inflation in the country. This target inflation number is between four and five percent on a year to year basis.
Currently, the inflation rate is hovering around the eight percent mark. The core inflation rate and the consumer price index are ruling even higher than this level. This shows that the common man is feeling the heat of the price rise much more than what is indicated by the inflation rate.
These are some factors that are pushing inflation here:
High commodity prices
One of the prime reasons for this rise in inflation is high commodity prices. Crude oil, precious as well as industrial metals, food stuff like tea coffee etc are ruling at high prices.
Global factors
Inflation is rising at the global level too. The recent growth in developing economies is another reason for this higher inflation rate. With the sharp growth seen in developing nations, the demand for many essential commodities like energy , metals and food grains has gone up significantly, whereas the corresponding rise in the supply side has not been happening.
Domestic factors
The domestic economy is growing at around 7-8 percent per annum from the last few years. The per capita income levels have gone up and as a result the demand for many commodities has increased significantly . The growth in the stock markets and the property market in the recent past have had a positive impact on the consumer sentiments, leading to more spending.
Hedge against inflation :
Real estate:
Historically, investments in real estate have worked as a good hedge against inflation. Carefullyselected real estate properties provide high returns. However, huge funds are needed and it is not an option that offers liquidity.
Real estate investment trusts (REIT) addresses these two issues. A REIT is like mutual funds and investors can buy units of REITs. Therefore, REITs enable investors to buy shares in a company that invests in large-scale real estate projects and many buildings. REITs are not available here but the recent SEBI’s draft proposal is paving the way for them to come here.
Equity:
Another way to hedge against inflation is to invest a certain portion of your funds in equities. Senior citizens and riskaverse investors should also invest a small percentage of their investment portfolio in equities. Investments in equity may not necessarily be just stocks - investors can do it through equity or balanced mutual funds too.
Commodities:
Investments in precious metals (gold, silver and platinum) is another popular way of hedging against inflation. However, investors should bear in mind the prices of precious metals can be quite volatile. Therefore, investments in precious metals would be a good addition to your investment portfolio as a hedge against inflation if they are purchased at the right time.
No comments:
Post a Comment