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Make your portfolio inflation-proof

With the average WPI-based inflation at 7.5% and CPI-based one above 10%, a bit of aggression is required to beat inflation. Four experts give their views

Business Standard 

Nilesh Shah
Director, Axis Direct

This July, Reserve Bank of India Governor D Subbarao spoke of his receding hairline and the high price he had to pay for a haircut. The idea was to to drive home the impact of rising rates of inflation. He said he used to pay Rs 25 for a haircut 20 years earlier; that went up to Rs 50 even as his hair thinned. “Now, when I have virtually no hair left, I pay Rs 150 for a haircut,” he said.

Since the beginning of this financial year, the wholesale price index (WPI) inflation has averaged 7.6 per cent and the consumer price index (CPI) at 10.12 per cent. As a result, the real returns from your investments have been falling sharply.

Business Standard asks four experts to give their views on how to beat this menace. Most feel gold – an important instrument to beat inflation – should form at least 10-20 per cent of your portfolio. Also, though equities have not done so well in last three years, our experts advise it aggressively. Fixed maturity plans also find favour with them, as these products are offering slightly-higher returns than fixed deposits:

Nilesh Shah**
Asset class Allocation
Equity (Direct and/or
Mutual Funds)
15 – 25%
Debt (Short-term or
FMPs / Long-term)
65 – 75%
Gold (Mutual Funds) 10 – 15%

In Friedman’s words, inflation is a form of taxation that can be imposed without legislation. It erodes the purchasing power of idle wealth; most noticeable in the current times, when inflation is hovering around eight per cent — higher than the interest earned from your bank’s savings account. This means, the value of Rs 100 in your wallet, if left undeployed, shall be Rs 92 in a year.

So, it is important you invest your cash surplus to beat inflation and at least retain your money’s purchasing power. For this, choose a portfolio with instruments like equity, debt and gold and make appropriate asset allocation on the basis of your risk profile.

In a conservative portfolio aimed at beating inflation, you can allocate 15-25 per cent in equities, 65-75 per cent in debt and 10-15 per cent in gold.

For investments in equities through mutual funds, systematic investment plan (SIP) should be used. You can adopt a smarter route by investing an amount across multiple funds based on parameters like price-to-earnings (P/E) ratio that reflect valuations — investing more when P/E is low, and less when P/E is high. This is better than a regular SIP, where investments rely on time of entry than valuations. Large-cap funds that comprise stocks of companies with better visibility of earnings growth, robust management and time-tested performance are recommended. You can also invest directly in stocks with adequate and thorough research.

In debt, you can invest in short-term mutual funds, including fixed maturity plans (FMPs) that accrue interest and provide fixed income. Also, if your risk profile allows for an allocation to long-term funds, you can benefit from capital appreciation along with accrued income in a falling interest-rate regime.

Historically, gold has been viewed and held as an ideal inflation-management instrument. Allocation to gold can be made physically or preferably through gold funds which are operationally more efficient, offering an easier mode of investment.

Remember to inflation-proof your portfolio through diversification and appropriate asset-allocation.

Vinod Sharma
Business Head (Pvt Broking &Wealth Mgmt),HDFC Securities

Whether your money is invested or is sitting pretty under your mattress, it loses value over time. If inflation is seven per cent and you allow your money to lie idle in a savings bank account, where you get interest at four per cent, you have lost three per cent in a year. How the money should be allocated to asset classes is a function of time horizon, kinds of returns you expect and the amount of risk you want to take.

I’d recommend 10 per cent exposure to tax-free bonds, where you can hope to earn 7.5 per cent a year. A good FMP can take 15 per cent of your resources. You can expect to make eight per cent from that. You can invest in a gold ETF too. It will be a hedge against risks to your equity investments. If equities don’t do well, it can make up for some of the returns. But, the bulk of your returns will have to be generated by equities alone. There are no long-term capital gains in equities and dividend is tax-free, but share prices are known to take a knock in bad times.

VK Sharma                                                                              (in %)
Instrument in portfolio Expected returns Total returns
Savings bank 5 4 0.2
Gold ETF 10 7 0.7
Tax free bonds 10 7.5 0.75
FMP 15 8 1.2
Equity 60 20 12
  100   14.85

Ashish Kehair
Head of Private Wealth Management,ICICI Securities

Indians are generally conservative investors, preferring to park their money in bank fixed deposits (or even savings bank accounts). This is primarily driven by our need for safety of capital, familiarity with the product, and access to liquidity in times of requirement.

Unfortunately, we don’t realise we are actually losing our capital due to the loss of purchasing power ability.

The aim to preserve capital is defeated by inflation. Simply put, assume you invest in an eight per cent FD, which will give you 5.6 per cent after tax (at 30 per cent rate). You have a monthly household expenditure of Rs 20,000 (Rs 2.4 lakh annually). After five years, at an average seven per cent rate of inflation, your monthly expenditure for the same articles would be Rs 28,000. This would mean an annual expense budget of 3.36 lakh.

If you had invested Rs 42 lakh for a return of Rs 2.4 lakh, you will be short by Rs 96 000 five years later, simply because tax-adjusted returns from FDs could not beat inflation.

Inflation is, thus, an invisible trap that investors generally fall prey to, without realising how it slowly erodes the real value of their wealth.

For the long term, some allocation needs to be given to tax-free coupon-bearing bonds like NHAI, PFC, IRFC or Hudco to capture tax-efficient cash flows for the very long term, where the cash flow yield is higher than inflation. However, since the coupon-bearing instruments suffer from reinvestment risk, some allocation needs to be in zero-coupon bonds like Nabard to minimise reinvestment risks while capturing the prevailing interest rates for the long term in a tax-efficient way.

Ashish Kehair*
Investment Strategy Instrument  % Allocation Expected pre-tax returns Expected post-tax returns
Cash - less than 3 months Ultra Short Term Funds 5 8.5 8
Active Investments - 6 to 18 months Short Term Income Funds 10 9.5 8.4
Short to medium term held to maturity - 1 to 5 years Fixed Maturity Plans 10 9.2 9
Long term held to maturity - coupon bearing NHAI/HUDCO/PFC/IRFC tax free bonds 15 8 8
Long term held to maturity - without reinvestment risk NABARD/REC zero coupon 10 8.8 8
Long term growth strategy - equity Equity MF / Direct Equity 25 15 15
Long term alternate strategy - gold Gold ETF 5 10 9
Long term alternate strategy - Real estate Real estate / real estate linked funds 20 12 11
Total portfolio returns   100 11 10.5
* All returns are indicative; post-tax returns are calculated on the bais of prevailing tax laws at a marginal tax rate of 30.9% & DDT of 13.5% ** Shah believes the allocation of investments in the suggested proportion could help beat the effects of inflation

Taher Badshah
Senior VP & Co-head of Equities, Motilal Oswal AMC-PMS

Equities as an asset class have managed to barely deliver a compounded return of under three per cent (measured by broad indices) over the past five years. During this period, precious metals (silver and gold) have delivered between 13 and 19 per cent.

However, the return differential between these asset classes during long periods also tends to be large and volatile. So, a portfolio approach that creates a judicious balance of different asset classes optimised to one’s risk appetite is essential, so that aggregate returns in excess of inflation can be generated.

To sustain returns ahead of inflation over long periods, equities as an investment avenue should merit a higher allocation, tempered down only by the risk-taking ability of an investor. This is notwithstanding the recent weak performance of equities, because they are known to have bouts of sub-par returns, but not for very long. Active investment strategies can be used to deal with sub-par market returns during shorter durations and the higher level of perceived risk in equity investments. Besides, equities are the only asset class that allows wealth-creation possibilities over an individual’s life span, to permanently overpower inflationary pressures.

A portfolio comprising a third of allocations to equities, going up to as high as 50 per cent, depending on an investor’s age and risk profile, would be recommended. Commodities and debt could equally constitute the balance.

Taher Badshah
in %



avg returns

Equity 50 20 10
Debt 25 8 2
Precious metals 25 10 2.5
Total returns     14.5

The way ahead 
The scale of risk to your investment due to inflation is surely high. The most appropriate step, to be taken soon, would be bringing about a change to your current portfolio and allocating funds for investments across asset classes to maximise returns.

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First Published: Mon, November 05 2012. 00:49 IST