Impact on Mutual Fund Investors due to rising Inflation

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Investing in a mutual fund,  Investors should be conscious of how the event is developing in terms of negative or insignificant inflation adjusted returns. What concerns to you as an investor is the return on the assets, which include equity, debt, gold, and real estate. If inflation rises over the RBI’s and other central banks’ target levels, a disruption in these asset classes is possible.

‘Santosh Joseph, Founder and Managing Partner of Germinate Investor Services LLP, discusses the reasons for increasing inflation, what central banks across the world may do to prevent it, and what investors can do to maintain producing inflation-adjusted returns with FE online.’

Is increasing inflation a reason to worry among investors?

Since the COVID-19 pandemic began early last year, central banks throughout the world have lowered interest rates or resisted from raising them in order to reduce the economic impact of the pandemic.

This has two effects: on one hand, it creates a cushion or soft stand for individuals to access finances and capital, and on the other, it allows people to manage better. On the other side, there is a flow of liquidity, which drives asset and commodity prices upward. Because there have been a lot of lockdowns and supply side limitations in terms of manufacturing, this inflation is greatly enhanced or may become extreme. 

As a result, when you have excess liquidity as a result of low interest rate policy and poor productivity, you end up with more money chasing fewer products created. As a result, this is driving up prices and producing an inflationary movement in the short run.

What effect does it have on  equity investing portfolio?

This inflationary movement is also affecting many of the stock exchange-listed firms. Inflation is defined as an increase in the costs of input commodities. In this market, not everyone is able to pass on the cost-cutting benefits of price increases. As a result of the massive increase in input prices of goods and services as a result of the inflationary trend, particularly commodities, that we have seen in recent months, stock earnings will be under pressure. As a result, profitability will be challenged in an already uncertain economic environment, impacting equity investments.

What is the right course of action for mutual fund investors?

Investing in a mutual fund,  Investors should be conscious of how the situation is going in terms of negative or insignificant inflation adjusted returns. They should look for items that may provide a genuine return, such as equity.

Even with equity, you must ensure that the balance is effectively maintained because if you are not well balanced, well weighted, or asset allocated, you may not end up generating the relatively excellent returns that you anticipated after taxes and inflation.

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