Inflation is simply an increase in the prices of daily necessities and the consequent depreciation of our currency. Current devaluation linked to inflation has greatly affected the prices of essential commodities such as edible oil, electricity, meat, fruits and vegetables.
Alarming inflation rates are rising in double digits, making money management difficult for the average middle-class family. To learn more about managing your money in tough times, visit our blog, Budgeting in a Hyperinflationary Environment
In a country that mainly invests in traditional money-based options like savings certificates, savings accounts and fixed deposits, rising inflation is a serious problem that requires a planned financial strategy that Get out of the ordinary.
Our savings are taking a huge hit due to inflation. Global events such as the Russian-Ukrainian war, CoVID-19, and our own internal politics are all factors of instability and prove that inflation is an uninvited factor in our lives.
These international events have adversely affected long-term investments and threatened our savings while increasing the average cost of living across Pakistan.
The rise in inflation in recent months shows that it’s always important to make sure that rising prices aren’t eroding your savings.
However, not every investment option is subject to market fluctuations. Now that we all know what inflation is and what it is doing to us, the real question is where should we invest our money to protect ourselves from the adverse effects of inflation?
How can we beat inflation through investment?
Our money is a rapidly depreciating asset in today’s economy, and the only way to deal with rising inflation rates is to invest carefully. Investors have difficulty predicting which investment opportunities can yield higher returns during periods of rising inflation.
Since inflation has the power to turn positive returns into negative, consider an inflation rate of 10%, while most banks in Pakistan offer a maximum interest rate of 8% on fixed deposits. This gap between inflation and returns reduces your long-term money and erodes your long-term savings.
Remember that there is no surefire way to beat inflation. However, there are a number of strategies that can help mitigate the impact of rising inflation on your investment portfolio and wealth creation plan.
We will go through some measures that can help protect savings from inflation.
Shop around for the best interest rate.
It’s a good rule of thumb to have at least six months of expenses saved in an easy-access account as an emergency fund. This account should ideally be easy to access so that you can withdraw money from it immediately.
Interest rates on savings accounts are generally low but can vary, so make sure you shop around for the best rate.
Try to invest for the long term.
If you can afford to lock up your money for a long period of time, long-term investment options are a better choice. Investing in stocks, bonds and equity funds has the potential to offer substantial returns on your initial investment. This is especially true if you start investing in down markets.
All these options operate on the principle of compounding and can add incremental value to your investment amount. However, not every long-term investment can do this, so invest after doing your research.
Look beyond fixed deposits
Historically fixed deposits are not a way to grow your wealth and do not protect the investor from inflation. If the interest rate is lower than the average inflation rate in the country, the return on your investment is compromised.
To ensure long-term financial stability and security, you should put your money to work. Savings through fixed deposits are safe but rarely enough to beat inflation.
To protect savings against inflation, you need to look beyond fixed deposits as an investment option. Explore avenues such as stocks, mutual funds, real estate, gold and exchange-traded funds (ETFs) to ensure you stay ahead of the crowd.
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Gold has always been a preferred investment option for people in Pakistan. This is generally seen as a good hedge against inflation. Culturally we all own gold in the form of gold jewelry that has been passed down from generation to generation.
The value of the metal has seen a steady rise during the economic crisis. It is usually seen in an inverse relationship with the US dollar. Apart from the usual investments in physical gold in the form of jewelery and coins, investors can also explore options like digital gold, gold ETFs and sovereign gold bonds as well as silver to store their wealth.
· Of real estate
Another successful investment option is real estate. Real estate generally acts as a hedge against inflation and allows property owners and owners to increase the value of their tangible assets as well as earn rental income from their investment.
There are two ways to invest in real estate: directly by buying property or investing indirectly through a real estate investment trust (REIT). The latter is also an opportunity for small and medium investors to participate in the commercial real estate market.
· Mutual funds and ETFs
Mutual funds and ETFs are very popular globally to help protect savings against inflation. Most typically offer returns linked to the current rate of inflation.
However, both can be volatile and are a high-risk option. Mutual funds and ETFs are viable investment options available to new investors and allow you to invest in a lump sum or through a monthly investment plan.
This means that people who have money in their accounts can start a monthly or recurring investment plan. These can be naturally liquid, so you can invest as little or as much as you want.
Shift long-term savings into equities.
For savings that are more than you need for your emergency fund and short-term needs, explore different investment options. Go for one with better long-term growth potential.
In Pakistan, historically, the most effective investments that have beaten inflation over the long term have been real estate and equities. However, you need a risk appetite to accept fluctuations in asset values.
Also, the average middle class person rarely has the capital to invest in real estate options. It needs saving.
Choose your investments wisely.
To avoid risk, you can choose other investments that reduce the loss in value and offset the risk of inflation. However, these will be less profitable and offer lower returns.
The effect of inflation on the economy is never uniform but it is repeated. Inflation is unlikely to go away, and reliance on traditional forms of savings and investment will not be sustainable in the long term, especially with the ever-increasing needs and wants of our families and children.
To ensure you have the financial ability to pay for the necessities and indulge in the luxuries of the modern world, you need to embrace change and become as financially literate as possible to save your hard-earned money. Must do.
Maximize tax efficiency.
A sensible investment strategy should include holding diversified assets and using tax-advantaged investment options. Figuring out what’s right for you isn’t always easy, and that’s where getting some qualified advice can help.
With the tax net widening and deepening, we need to assess which path will be best in light of tax rates. Many pension-based investment plans are tax-advantaged vehicles that can help grow the future value of your savings.
The bottom line
If you invest, you can reduce the risk of losing value to inflation by spreading it among different forms of investment, known as asset classes. These can be shares, bonds, gold, property and cash. The process of spreading investments across different asset classes is known as diversification.
A diversified portfolio does not guarantee that you will be protected from losses. But it helps reduce the risk of losing value to inflation. This happens because the values of different types of assets do not always move in the same direction.
In a diversified portfolio, a decline in the value of one investment has less overall impact.
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