strong history. Thus, equity investments are a good way to counter inflationary trends. However, remember that equities are not the best of options for the short term due to the increasing volatility which is seen in the stock markets.
Real estate: This is yet another asset class that deliver returns in line with inflation. When inflation is high, property prices also tend to go up, giving you good returns. You can also let out your property and earn rental income, which will also be in line with inflation.
However, not everyone can invest in real estate due to the high property prices and legal formalities. It should nevertheless be considered as one of the investments in your portfolio to help you gain from both capital appreciation as well as earn rental income. Remember to choose a reputed builder with a good track record. Also consider all hidden costs, location aspects, potential for the area to develop and other legal aspects before investing in property.
Inflation-indexed bonds (IIB): These are debt instruments that deliver returns in line with the inflationary trends. That is, the principal amount of the bond is adjusted to reflect inflation in the economy. While these are good in inflationary situations by helping you earn higher interest, they may not work to your advantage in deflationary scenarios. Therefore, you must invest in them only if you expect a high inflation scenario.
Gold: Investing in gold acts as an effective long-term hedge against inflation. Equity and gold generally move in opposite directions, helping you balance your returns.
While the best way to deal with inflation would be to invest in instruments that help you counter inflation, you must also pay attention to your asset allocation profile, depending on your age, risk appetite, asset and liability pattern and financial goals.
The writer is CEO, BankBazaar.com