For two months in a row, India’s retail inflation, as measured by the Consumer Price Index (CPI), exceeded the Reserve Bank of India’s (RBIs) threshold. CPI inflation dropped to 5.59 percent in July, a year-on-year decrease.
This time, however, retail inflation may be more structural than transient. In response, the Reserve Bank of India (RBI) raised its CPI prediction for FY22 from 5.1 percent to 5.7 percent.
So, what are the investment principles retail investors should follow to keep inflation under control in their investments?
First and foremost, concentrate on the real return. The return you get minus inflation is what you get as a real return. Inflation erodes the pricing power of your investments, which is why. As a result, fixed-income investments such as FDs have failed to keep pace with inflation.
For example, if your bank savings account pays a nominal return (return before inflation) of 4%, the real return will be negative because average inflation has been around 6%, which is much greater than the 4% bank savings account yield.
Second, begin early and regularly invest. The earlier you begin investing your money, the more likely you are to make more and meet your objectives faster.
Starting early and investing consistently allows you to invest a small amount and achieve your goals more quickly. Equity mutual funds produce higher returns over time, so the earlier you start investing, the greater the potential for your money to grow.
Timing the market vs. time in the market is a major difference. This indicates that the longer you keep your money invested, the higher your risk-adjusted returns will be.
It also saves you the time and effort of trying to predict the market and research and appraise macroeconomic factors like inflation.
Thirdly align your portfolio to your risk tolerance. Take time to consider your risk appetite, risk tolerance, and risk capacity. When you first start investing in mutual funds, you’ll discover that what works for you may not work for another investor.
This is because each investor has a unique risk profile. Risk capacity refers to your ability to take financial risks based on factors such as age, income, and other factors. Risk tolerance, on the other hand, relates to an investor’s readiness to take or “tolerate” risks, as well as the level of return volatility that they are willing to accept.
As an investor, risk appetite refers to the greatest amount of risk you are willing to take. To estimate the risk level you are okay with taking on, you must be well-versed in your goals and timescale.