The Hindu Business Line : Guarding against rise in prices

With domestic inflation recently surging past the 6 per cent mark, reams of newsprint and gallons of ink have been devoted to what the Finance Minister should do and should not do, to curb inflation.

But if you thought that inflation is just a number for policy-makers to worry about, remember that inflation influences your personal investment decisions in several ways as well. Here is what you need to pay attention to:

Save more: A higher inflation rate on a sustained basis may require you to set aside a larger portion of your current income for savings. If you are planning for long-term financial goals such as retirement or a child's education, higher inflation expands the outlays that you would require to meet these goals. If you have a sufficient disposable surplus, you can step up your systematic investments in mutual funds or contribute a higher amount to your company pension plan, if you expect prices to rise.

If you cannot bump up your savings, then you may have to consider adding assets with a higher return potential (even if it means more risk) such as equities to your portfolio, to improve the returns that you earn over the long term.

Re-evaluate asset allocation: Your outlook on inflation also influences the kind of assets that you include in your portfolio.

Rising inflation can reduce the `real' return you earn from fixed-income investments. On the other hand, equities, as an asset class, usually tend to perform well during periods of high inflation, as higher selling prices can help bolster corporate earnings and, thus, help their stock prices. Commodities, especially gold, are supposed to be a good hedge against inflation and tend to perform well during periods of high inflation.

So, including a gold fund or a commodity fund in your portfolio may be a good means to guard against rising inflation.

The `official' rate: As a student, you must have often read that inflation steadily reduces the purchasing power of your money.

But with the official inflation rate hovering at 6 per cent, you probably feel that inflation is nothing to worry about, as your annual income is increasing at a much higher rate than 6 per cent.

But remember that the `official' number on inflation is only an index of trends in a specific basket of agricultural and manufactured commodities.

The basket of goods you buy may be quite different from that which is captured in the index.

Moreover, as the inflation index does not have any representation from the services sector, it does not capture the escalation in your house rent, your child's school fees, the cost of conveyance or any other services that you use on a regular basis.

It is up to you to budget for increases in these. While making your investment plans, factoring in an inflation rate that is higher than the `official' rate may be prudent.

Please send suggestions and queries to younginvestor@thehindu.co.in, or The Research Bureau, The Hindu Business Line, 859-860, Anna Salai, Chennai-600002.