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INVEST In Property To Beat INFLATION
Posted by Pradeep Sadanapalli | April 26, 2008 | 1,797 views
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In times of rising inflation, investors are scrambling for new avenues. Property works well for investors as an investment option in such a scenario, suggests Kavita Sriram.
Inflation has touched high levels. It soared past the seven percent mark pulling up with it prices of food, essential commodities and manufactured goods.
What is inflation?
Inflation is defined as a persistent increase in the level of consumer prices or a constant decline in the purchasing power of money,caused by an increase in available currency and credit beyond the proportion of available goods and services. A general upward price movement of goods and services is noticed in such an economy.
In this scenario, the price of money is seen to be going down. The reason can be the creation and circulation of excess money in the system. The Reserve Bank of India (RBI) tries to bridle in inflation by resorting to monetary measures like hike in interest rate or tighten money supply through a hike in the cash reserve ratio (CRR).
Investments in debt
Debt or fixed income instruments seek to preserve capital and provide relatively small returns. These are low-risk, low-return investments.In an inflationary economy, investment in debt may not work out to be feasible.
Suppose there is an instrument that yields four percent returns and the lockin period is five years.If inflation is marching up with leaps and bounds, the value or purchasing power of money will come down in these intervening five years. In order to beat inflation, the returns have to be greater than the meager four percent .
Debt funds and bonds will erode your hardearned money in a high inflation economy. The minimal returns from long-term bank deposits will not help you for your expenses like saving for children’s marriage or education. This is when you look for alternative routes of investment.
Investments in equity
The stock markets are highly volatile. There are times of bull rides, and at other times, disappointing bear market conditions. The alternating patterns of ups and downs take investors by surprise. This unpredictability is a major drawback of equity. Many investors churn out big profits, many others lose everything.
Investments in equity must be done with a long-term perspective. Small investors can see good returns if they stay invested for 5-10 years. Stock markets are an excellent hedge against inflation. But the investor must be knowledgeable to pick fundamentally-strong stocks with excellent growth potential.
Wrong picks can prove detrimental. That is how some inexperienced, ambitious investors have lost money on stocks.
Investments in property
Investments in property are an excellent hedge against inflation. With inflation the construction costs are bound to go upwards.As the years roll by,the value of the property increases many times. Unlike investments in debt, the returns here are in line with inflation. Investing in a house or piece of land gives you the pride of ownership,much-needed capital appreciation and excellent rate of returns. It is considered a wise way of risk diversification and an excellent hedge against inflation.
SOURCES:
Times Of India
Topics: Money Matters, Property Matters, Tips |
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