How Inflation Impacts Your Investment Returns and How to Beat It

Causes of Inflation

Awareness about the causes leading to it is the first step in the process of countering inflation. The multiple economic factors responsible for it are :

1. Increased production cost due to a rise in prices of raw ingredients, wages of labourers, cost of transportation and supply chain disruptions, can lead to higher prices when goods reach consumers.
2. Elevated consumer demands due to improved salaries, easy availability of loans can also give rise to inflation if the supply side does not match up with the increased demands.
3. Changes in monetary policies by the Government, for instance, tax cuts, reduction of interest rates on loans and easing regulations, encourage the injection of more money into the economy and induce more borrowing and spending. This results in demand-driven inflation.
4. Depreciation of currency increases the cost of imported goods. If an economy is dependent on an imported good for its essential items like fuel and food, then this depreciation can also create inflation.
5. Not only intrinsic factors but extrinsic factors like geopolitical tensions amongst countries, trade agreements, and import-export sanctions disrupt markets and can give rise to inflation worldwide.

Inflation Impact Across Investment Instruments

Since investment instruments are varied, they respond differently to inflation, and so do the investment returns:

1. Influence on Stocks or Equities: A moderate inflation is beneficial as it can drive economic growth by raising corporate revenues, resulting in improved company performance and higher stock prices. However, an excessive inflation rate is an obvious deterrent, raising the manufacturing costs, thinning of profit margins and weakening consumer demands.
2. Fixed income investments with guaranteed return on investments like Bonds or Bank Deposits are quite vulnerable to inflation. If the inflation rate goes beyond the return rate, it impacts the net return negatively.
3. Alternate assets like property values and rental incomes tend to increase with inflation, acting as inflation hedges. They appreciate in price, adjusting with the inflation rate and preserve the purchasing power.
4. Gold and precious metals also act as a hedge against inflation. They preserve the actual value even when the currency weakens.
5. Inflation is as diverse in different countries as the economies across the world. Hence, global investments can become an important investment tool for effective portfolio diversification. Considering fluctuations in currency and geopolitical impact to be constant, investment in low low-inflation foreign market can offset low returns in high high-inflation domestic market.

Outsmarting Inflation

A well-curated inflation-indexed investment plan is something to consider if you want to outpace inflation:

1. Inflation-indexed securities like company and government-issued bonds are good options as the principal amounts of these instruments are adjusted to inflation rates. Hence, these can offer higher than inflation returns.
2. Records show that equity or stocks have outperformed inflation over time. Make time your ally to ride over inflation by investing in stocks of potential and quality companies. A well-constructed and monitored equity portfolio can become your best weapon to beat inflation.
3. Consider real assets to further diversify your portfolio and earn investment returns beyond inflation rates. Real estate, precious metals and some commodities tend to perform well even when inflation is on the rise. These long-term, tangible assets are good alternatives to retain or increase value when currency depreciates.
4. Reassessment and balancing your portfolio with inflation-adjusted investment plans are crucial, considering the dynamicity of the economic sector. Comparing the returns and product features on digital platforms like Jio Insurance Broking Ltd. can be effective while deciding on the instrument. The platform's diverse investment options not only offer the best in the industry but also help you make an informed decision to beat inflation.

Outrun and Outperform The Disruptor

The occurrence of inflation may be inevitable, but its impact on your financial future does not have to be negative. By understanding the investment plans and how they react to inflation, you can align the investment returns according to expectations to meet your ultimate financial goals within the desired tenure. Instead of attempting to avoid inflation, research it, plan for it and navigate your investment journey with confidence.