Effects of Inflation on Investments

What is Inflation?

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. It means that the purchasing power of money is decreasing, causing the prices of goods and services to rise. Inflation is usually measured by the inflation rate, which is the percentage increase in prices over a given period of time.

How does inflation impact your savings and investments?

To combat the effects of inflation, it's important to invest in assets that have the potential to outpace inflation, such as stocks or real estate. Additionally, investing in inflation-protected securities, such as TIPS (Treasury Inflation-Protected Securities), can help protect your investments against the negative effects of inflation.

Example of Impact of Inflation on Savings and Investments

For example, suppose you have Rs.10,000 in a savings account that earns 5% interest. If the inflation rate is 8%. In a year you should actually have Rs.10,500 in your bank account after receiving the interest. But considering inflation, it also means that the things that cost you Rs.10,000 previously will now cost Rs.10,800 due to inflation. Thus, the purchasing power of your money will decrease by 3% over the course of a year. This means that your Rs.10,000 will only be worth Rs. 9,700 at the end of the year in terms of what it can buy. As a result, your savings have effectively decreased in value by Rs. 300 due to inflation.

This is how inflations eats up your returns, thus, decreasing the actual return.

After understanding the actual inflation levels you need to continuously monitor and change your investment from one investment class to other or change the allocation to beat inflation and generate sustainable returns.

How to Reduce the Impact of Inflation on Your Savings?

Inflation can have a significant impact on your investments. With inflation, the purchasing power of your money decreases over time. This means that the value of your investments may also decrease in real terms. However, there are various strategies that you can use to protect your investments against the negative effects of inflation.

One strategy is to invest in assets that have the potential to outpace inflation, such as stocks or real estate. Historically, stocks have provided returns that have outpaced inflation over the long term. Real estate has also been a popular investment choice for many individuals, as it can appreciate in value over time and provide a steady stream of rental income.
Gold is often considered a reliable hedge against inflation, as its value tends to increase when the purchasing power of currency decreases. However, investing in gold also has opportunity costs. When inflation is high and interest rates are increased, the opportunity cost of holding gold also rises. Additionally, storing large amounts of physical gold can be risky and costly and so one can also prefer Bullion Strategy by Stratzy you can invest in gold and silver without actually holding these physically.
Another strategy is to consider investing in inflation-protected securities, such as TIPS (Treasury Inflation-Protected Securities). These securities are designed to provide protection against inflation, as their returns are adjusted for changes in the inflation rate. This means that if inflation increases, the value of your investment in TIPS will increase as well.
Diversifying your investments across different asset classes is also important to reduce risk and maximize returns. By spreading your investments across different asset classes, you can reduce the impact of inflation on your overall portfolio. For example, Stratzy has created Foundation Portfolio wherein your investments are diversified into gold, equity, and bond, and based on market conditions the allocation increase or reduces in any particular class. This helps to not only beat inflation but gives better and safe returns.
Investing in commodities, such as gold or oil, can also be a good way to protect your investments against inflation. During periods of inflation, commodities tend to appreciate in value, as the demand for them increases. By investing in commodities, you can potentially benefit from this appreciation in value.
Finally, it's important to monitor inflation rates and adjust your investment strategy accordingly to ensure your investments remain protected against inflation. You should keep track of the inflation rate and adjust your investments as necessary. For example, if the inflation rate is increasing, you may want to shift your investments toward bonds and when inflation starts declining then you can shift back to stocks just like the case in Balanced Portfolio by Stratzy

Thus now you’re clear about what inflation is and how it impacts savings and investments. You can follow the suggested strategies to reduce the impact of inflation, including investing in assets that outpace inflation, diversifying investments, and monitoring inflation rates but you should consult your investment advisor before making any investment decision. Investment options like TIPS, gold, and commodities, and recommend Stratzy's Foundation Portfolio and Balanced Portfolio as investment options.