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How to inflation-proof your investment portfolio?

The world today is drowning in the news of rising Inflation. Inflation has the potential to reduce the value of your investment returns. Thus, it is crucial to safeguard your investments with this wave of ever-rising inflation. In this blog, we have discussed how to make your investment portfolio inflation-proof.
Inflation-proof investment portfolio

High inflation has been headlines in India, the US, and many other global economies. In June 2022, India's Consumer Price Index (CPI) came at 7.01%, much higher than the RBI's 4-6% tolerance band. In the US, the June inflation accelerated to 9.1%, which is a multi-decade high. During these high inflationary times, the stock markets are volatile with a negative bias.

Fixed income is giving negative returns in most cases after considering high inflation and taxation. In this article, we will discuss how to inflation-proof your investment portfolio.

What is inflation, and how does it erode the purchasing power of your money?

  • Inflation is the general rise in the prices of goods and services over time. For example, if your kid’s school fee was Rs. 50,000 last year, and it is Rs. 55,000 this year, it means the school fees inflation is 10%. Assume that you had made a provision of Rs. 50,000 and kept it as cash at home last year. This year, you will still have to put Rs. 5,000 from your pocket to pay the Rs. 55,000 fees. 
  • Last year, if you deposited the Rs. 50,000 in a savings account that paid 3% interest, this year, you would have 51,500. You will still have to put Rs. 3,500 from your pocket to pay the Rs. 55,000 fees this year. In this manner, inflation erodes the purchasing power of your money.
  • To overcome the above inflation challenge, you need to invest your money in a manner that generates returns higher than the inflation rate; how inflation erodes the purchasing power of your money
How to inflation-proof your investment portfolio_1
  • The above table shows how if you had Rs. 1 lakh in 1984 and kept it in cash in 2016, you would be able to buy goods and services worth only Rs. 7,451. Hence, it is crucial to invest your money, and even more essential to generate inflation-beating returns.

Inflation trend in India

  • Before we talk about how to inflation-proof your investment portfolio, let us see the inflation trend in India.

Chart: 20-year inflation trend in India

How to inflation-proof your investment portfolio_2
  • The above chart shows how inflation ranged between 3.5% and 12.00% in the last 20 years. While this is the general CPI inflation, which is the average of several components, the inflation for individual components may be much higher. For example, the annual education inflation may be an average of 10% or higher. Medical inflation may be even higher than 10% p.a. on average. Sometimes, the food inflation for certain components, such as onions, tomatoes, etc., may shoot up drastically for a certain period and disturb family budgets

Inflation trend for 2022

  • After seeing the inflation trend for the last 20 years, let us see the inflation trend for 2022.

Chart: Inflation trend for 2022

How to inflation-proof your investment portfolio_3
  • The above chart shows how inflation has been trending higher in 2022, from a low of 4.3% in September 2021 to a high of 7.79% in April 2022. Now let us discuss how to inflation-proof our investment portfolio with equity mutual funds.

How to inflation-proof your investment portfolio?

  • Equities have the potential to give inflation-beating returns. Since its inception (1996), the Nifty 50 Index has given a return of 10.90% CAGR to date (30th June 2022). The Nifty 50 Index CAGR is much higher than the average inflation rate during the same period.
How to inflation-proof your investment portfolio_4
  • The above chart shows how the Nifty 50 Index has generated a 10.90% CAGR since its inception. Therefore, if an investor had invested in a Nifty 50 Index Fund, they would have generated inflation-beating returns. Most AMCs offer Nifty 50 index funds. Let us see the performance of these funds in the last five years.

Table: 5-year performance of Nifty 50 index funds

Scheme nameAUM (Rs. crores)1 year3 years5 years
IDFC Nifty Index Fund4246.96%15.09%12.22%
Taurus Nifty 50 Index  Fund1.695.98%14.90%12.17%
UTI Nifty 50 Index Fund7,0686.81%14.83%12.09%
HDFC Index Fund – Nifty 50 Plan5,9706.75%14.69%12.02%
Tata Nifty 50 Index Fund2636.89%14.76%12.00%
  • Note: The above returns are as of 22nd July 2022. The returns are for direct mutual fund schemes with growth option. The one-year returns are absolute, and the three and five-year returns are CAGR. The funds have been ranked based on five-year returns.
  • The table above shows how the top 5 Nifty 50 index funds have given around 12% CAGR returns in the last five years. These are decent returns and have beaten inflation. So, had you invested in a Nifty 50 index fund, your portfolio would have been inflation-proof.
  • Similarly, you can invest in other broad market capitalisation index funds such as Nifty Next 50, Midcap 150, and Smallcap 250 index funds and make your overall investment portfolio inflation-proof in the long run.

Core and satellite portfolio

  • You can adopt a core and satellite portfolio approach to further inflation-proof your investment portfolio. Based on your risk appetite, you can split your equity investment portfolio, for example, core (75%) and satellite (25%) portfolio.
  • Your core portfolio can include all broad market capitalisation index funds based on Nifty 50, Nifty Next 50, Midcap 150, and Smallcap 250 indices. The satellite portfolio can include investment in certain sectoral and thematic mutual fund schemes that are expected to do well during times of high inflation. Based on the recent scenario, some of the sectors that did well include:
    1. Commodities: One of the main reasons for the current high inflation is high commodity prices. So, commodities as a sector have done well and commodity funds generated good returns in the last 2 years.
    2. Infrastructure: During the pandemic, when the private sector was not investing much, the Government increased its spending. Apart from social welfare, the Government focused spending on infrastructure to support economic growth. So, infrastructure as a theme has done well in the last couple of years.
    3. Information technology (IT): During the pandemic, the demand for digitisation and other IT products and services went through the roof. The order books of most IT companies were at all-time highs, and the deal pipeline was very promising. So, IT has done well in the last couple of years, although 2022 has not been a very good year for IT.
  • Table: 2-year performance of sectoral / thematic funds
Scheme nameAUM (Rs. crores)1 year2 years
ICICI Prudential Commodities Fund671-1.67%56.39%
ICICI Prudential Technology Fund8,508-1.76%44.56%
ICICI Prudential Infrastructure Fund1,82619.13%44.04%
Tata Infrastructure Fund78914.85%42.73%
Quant Infrastructure Fund53922.27%35.90%
  • Note: The above returns are as of 22nd July 2022. The returns are for direct mutual fund schemes with growth options. The one-year returns are absolute, and the two-year returns are CAGR. The funds have been ranked based on two-year returns.
  • The above table shows how some sectoral and thematic funds have delivered inflation-beating excellent returns of 35% to 56% CAGR in the last two years. Similarly, based on the current scenario, you can identify sectoral and thematic funds and invest your satellite portfolio money in them to inflation-proof your overall investment portfolio.

A core and satellite portfolio approach can inflation-proof your investment portfolio

We have seen how broad market capitalisation index funds and some sectoral funds have generated inflation-beating returns in the past. You can adopt a core and satellite portfolio approach. The core portfolio can hold index funds on indices such as Nifty 50, Nifty Next 50, Midcap 150, and Smallcap 250. The satellite portfolio can hold sectoral and thematic funds. Thus, a core and satellite investment portfolio can inflation-proof your overall investment portfolio.

Investing in mutual funds with the Glide Invest App

In this article, we have understood how we can inflation-proof our investment portfolio through a combination of index funds and sectoral/thematic funds. You can partner with the Glide Invest App for your financial planning journey to get recommendations for the appropriate mutual fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals

With Glide Invest, you will get guidance for:

  1. A personalised risk profile assessment
  2. Identifying your financial goals
  3. Appropriate asset allocation
  4. Making a financial plan for each goal
  5. Automating the financial plan
  6. Review and analysis of your financial plan 
  7. Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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