Best Ways to Beat Inflation in India

The constantly rising prices of consumable goods in the market are a big concern for all. Prices go up every few months, never to come down again. An egg that was once sold for 25 paise a few decades ago costs Rs 5 today. Similarly, the cost of fuel, household items, vegetables, and all other necessities of life keep increasing from time to time. The purchasing power of a Rs 100 currency note a few years ago was much more than what it is today. This is called inflation.
 
Inflation negatively impacts your purchasing power. It is difficult to hedge against inflation if you do not increase your earnings and invest your money wisely.
 

What are the common causes of inflation?

 
Here are the three reasons for inflation in any economy: 
 

• Demand push inflation

  The growing population is always a source of concern for the economy. Demand push inflation occurs when businesses fail to increase production to meet the current demand for goods and services. To keep the situation under control, they raise the prices of their products.
   

• Cost-push inflation

  Cost-push inflation is when price increases due to raised production costs. For example, if the cost of raw materials rises or you pay a higher wage to your labour, the cost of manufacturing the product rises significantly. To cover the increased production costs, businesses raise the product's price.
   

• Devaluation

  Devaluation-based inflation occurs when your country's currency loses value compared to other currencies. Devaluation raises the cost of imports, making the consumption of exported goods more expensive.
   

What does ‘beating inflation’ mean?

Beating inflation is essentially a hedge against inflation. It means that the returns generated by your income are higher than the rate of inflation in the economy. Let's look at an example to understand it better:
 
Suppose, two years ago, you invested in a scheme that generated an annual return of 8%. During that time, for both years, the inflation rate was 5%. In this case, your investment returns are better than the inflation rate. 
 
But if you had secured your savings in a fixed deposit with an interest rate of 5% and the rate of inflation pegged at 6%, then you are losing your money. Therefore, it is very important to check the interest rates offered in savings schemes.
 

How to beat inflation in India?

 
You will find multiple investment options in the market to beat the growing inflation. These include:
 

1. Direct investment in stocks

   The stock market has immense potential. However, when it comes to investing, you need expert knowledge to deal with its volatility. You can invest in stock on the primary or secondary market.
    
   In the primary market, the shares are open for subscription for the first time through an initial public offering (IPO). When you subscribe to an IPO, the company allots shares based on availability using a computerised system.
    
   In the case of the secondary market, you simply log in to your trading account, select the number of shares of the company you want to invest in, select the price point, and make payment. When purchasing stock directly, consider the company's financials, shareholding patterns, and share price movement on the price chart over the previous few years.
    
   Moving on to the stock market's return, Sensex has delivered a compound annual growth rate (CAGR) of around 15% over the last five years.
    

2. Mutual funds investment

   Mutual funds are relatively safer than stock investments due to diversification. Depending on your risk appetite, you can invest in debt-oriented funds, equity-oriented funds, or equity-linked savings schemes (ELSS). 
    
   In a mutual fund, the funds are managed by professionals. Therefore, you do not need to worry about market volatility much. Before investing in any mutual fund scheme, you should consider the following ratios:
    
   • Expense ratio 
     It is the cost fund houses charge to manage that specific scheme.
      
   • Beta
     It tells you how volatile the scheme is compared to its benchmark.
      
   • Sharp ratio
     It monitors the scheme's performance in relation to the risk taken.
      
   Mutual fund returns usually range between 10% and 15%. 
    

3. Real estate

   Real estate investment is beneficial in two ways—first, it provides you with appreciation benefits. Second, you can earn a passive income by renting it out for commercial or residential purposes. However, investing in real estate necessitates a substantial sum of money. In this case, Real Estate Investment Trust is the best option (REIT).
    
   A real estate investment trust (REIT) is a company that pools money from various investors and invests it in real estate. REIT portfolios typically include a variety of properties such as hotels, retail centres, shopping complexes, warehouses, and more. The income generated by these assets is distributed among investors in proportion to their investment.
    
   In India, the concept of REIT investment is still relatively new. You must consider the reputation of the corporation offering this investment scheme and whether or not the scheme portfolio is diverse.
    

4. Gold investment

   If market jargon confuses you, simply invest your money in gold. It is one of the most precious metals in the world. There has been a dramatic spike in the gold rates in the last few years. 
    
   The price of 24-carat gold per 10 grams was around Rs 23,000 at the start of 2016. Presently, the same quality of gold costs around Rs 52,000 per 10 grams. So, you can compare inflation and investment returns here and decide whether gold is a good investment.
    

5. Inflation-indexed bonds

   As the name implies, the primary purpose of the inflation-indexed bond or IIB is to protect investors from inflation. It allows you to earn consistent returns regardless of inflation. The capital in this type of investment is directly proportional to inflation. It means that as inflation rises, your capital amount will go up. The current interest rate is mostly higher than what was promised at the outset of the investment. The best feature of IIB is that even in the face of deflation, your capital is not lost; only your interest income is reduced.
    

6. Alternative investment

   If you enjoy art or collecting antiques, alternative investment is the way to beat inflation. You can buy vintage cars, paintings by well-known artists, and old-age coins. These items' value grows over time and can outperform the inflation rate significantly.
    
   Other alternatives include investing in hedge funds or putting your money into a potential start-up via unlisted shares.
    

7. Investment in commodities

   Investing in commodities includes purchasing foreign currencies, precious metals, oil, natural gas, and grains. You can execute your commodity trade in India at any four exchanges listed below:
    
   • Multi Commodity Exchange (MCX)
   • Indian Commodity Exchange (ICEX)
   • National Multi Commodity Exchange (NMCE)
   • National Commodity and Derivatives Exchange (NCDEX)
    
   Commodity returns outperform inflation. But, because of the high volatility, the risk of losing out on capital is also high. So, before investing in commodity returns you must access your risk appetite.
    

Also Read: 6 Investment Rules Everyone in their 20’s should follow
 

8. Rebalance your portfolio

   The investment you made years ago may no longer be feasible in the current economic situation. Not only does inflation rise over time, but so do your goals and ambitions. In this case, you can consider rebalancing your existing portfolio. For example, you could redeem your bank FD and invest the proceeds in a recently issued corporate bond.
    

What are the other ways to beat inflation?

 

• Avoid unjustified expenses. Spending extravagant money on branded items, regular dining at expensive restaurants, clubbing, or replacing your gadgets too frequently should be avoided.

 

• Plan your finances wisely. Apply the 50:30:20 rule. That is, set aside 50% of your income for necessities, 30% for lifestyle, and 20% for savings. If you receive a windfall profit in any month, invest it in one of the investment tools listed above.
   

• Maintain emergency funds. If an unexpected event occurs, the emergency reserve will assist you in dealing with it. If you have not yet started this emergency fund and a medical emergency arises, you can seek assistance from medical insurance or a personal loan.

 

To conclude

 
You can outperform inflation with wise savings and smart investments. Just working hard or saving every month is not enough. It is equally important to put your hard-earned savings into work and make them earn money for you. Keep a track of your expenses, avoid unnecessary indulges, get financial education, and diversify your investments in the stock market, mutual funds, government bonds, and other investment schemes. Be abreast of the market, its opportunities, and volatility. This is the best way to beat inflation.