Authored by Jayant Row in Investments
Published on 05-05-2009
Investment is purposefully deferring consumption so that the saved resource can create benefits for the future. It can also mean creating assets so that they earn income or profit. Investment is an individual choice which enables an investor to place his money in property, stocks, and securities or bonds so that they generate returns over time. It is therefore necessary that any returns that do accrue have to do so without eroding the value of the investment. This means that any tangible returns have to be over and above the rate of inflation. If the investment loses its value of the initial money invested, this can only be called speculation.
Inflation reduces purchasing power and the value of the savings made. So a prudent investor has to look for ways which can beat the rate of inflation. Such investments are available in the form of Real Return Bonds. These are government backed securities which are protected against inflation by having the capital and interest payments adjusted in line with the consumer price index. This index tracks the inflation. So any adjustment made does protect the investor’s capital. These securities do not pay a very high rate of return and therefore are not very popular. But they are a sure way of beating the inflation.
Equities are another method of ensuring that your investment beats the inflation. Inflation does affect the value of stocks. But in the long run, companies are constantly increasing their turnover and profits and therefore the value of their stocks tend to go up. While investing in equities however a lot of judgment has to be exercised. Only stocks of companies that are well run should be included in the portfolio.
One can avoid the uncertainty of company stocks by investing in market index mutual funds, as these follow the broad pattern of the stock market. This saves the investor of having to look after a diversified portfolio, and at the same time, allowing him to take advantage of the market strength.
Another area that can be considered for beating the inflation is by investing in the commodities market. The prices of commodities tend to follow the inflation. As a matter of fact, it is the prices of commodities that influence inflation. So if you are invested in commodities your investments would rise along with the inflation. This would ensure that at no time your investment goes below the inflation rate.
However, a note of caution is added here. Both equities and commodities are driven by speculative tendencies and there is always a chance that your investment can be subject to very big drops in their value. There are other investment avenues like real estate, art and land. They are considered safe inflation hedges in normal times. Such assets can be hard to buy or sell as a lot of other factors are involved.
Certificates of Deposit and the money market are other avenues for investment that will generally beat the rate of inflation. Returns may still be quite modest, but it is almost certain that they will beat the inflation rate.