the principal from inflation, delivering returns that nullify inflation. The principal amount of the bond is adjusted to reflect the inflation in the economy.
Over the long run, equities give better returns and help combat inflation. An experienced investor who understands the markets and has the time and knowledge to deal with volatility can consider investing directly in stocks. Analysts say it is important that a retail investor does his research well and owns a diversified portfolio of stocks (or invests in diversified equity funds). “Despite short-term cyclical fluctuations, returns generated from equities supersede those from other asset classes,” says Brijesh Damodaran, founder and managing partner at Zeus WealthWays LLP.
Sectors like pharma continue to be defensive, and companies that produce primary goods benefit from price rise. Even the IT sector remains unaffected from high inflation, and certain FMCG companies continue to post healthy results. As part of portfolio rebalancing, short-selling is a good way to ensure profit-booking when markets are volatile. In a volatile market, prices move too frequently and investors need to take some risk after consulting their broker or fund manager.
Analysts suggest that investments in commodities can be a good way to rebalance the portfolio. If an investor is not looking at investing directly in commodities, he can go for commodity funds that invest in companies related to gold and silver, energy stocks and metal and mining. However, there is a caveat: commodity prices are highly cyclical and subject to macroeconomic policies of the government and demand and supply.
Always a good hedge against inflation, gold has been a favourite of retail investors in India, though in the form of jewellery. However, since gold in physical form does not provide any interest income (unlike fixed deposits),and nor does it pay dividends (unlike equities), one has to wait for the metal to appreciate before selling it.
Real estate is an asset class that delivers returns in line with inflation. In inflationary periods, property prices move upwards and give good returns on sale. In such times, analysts say, retail investors must rebalance their portfolio every six months, factoring in the effects of taxation and exit loads.