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Can Your Stock Investment Beat Inflation?

Tribe's Weekly
Tribe's Weekly
India’s inflation rate still remains above the Reserve Bank’s ideal level of 4-6% for the 6th consecutive month.

Can Stock Market Beat Inflation?
Can Stock Market Beat Inflation?
Inflation is one thing that cannot be stopped. According to one source, the inflation rate of India is 6.71% in July 2022 and is above 4-6%, the ideal value as per RBI. As the record shows no other investment class has performed well when compared to the stock market over the years with an average yearly return of over 10%. Thus investing in the stock market may be the best way to beat Inflation.
In the long run, Equity is the asset class that will help you beat inflation and also earn positive returns. By the way, do you know in India, only 3% of people invest in the stock market. Investing in stocks is presumed to be risky by some, but studies have proved that investing money in the right shares for the long term can provide inflation-beating returns. Investor needs to have good knowledge of the market to understand the price trends as it helps in making the best investment decision. Before investing in stocks, investors and traders do a lot of research about the company, and accordingly, make strategies and create a diversified portfolio to achieve the investment goals.
What Is Inflation?
Inflation is simply the rise in the prices of most goods and services of daily or common use. These include food, clothing, housing, recreation, transport, consumer staples, etc.
It is measured as the average price change in commodities & services over time. Inflation indicates the decrease in the purchasing power of a unit of a country’s currency & is measured in percentage.
The opposite of inflation is ‘deflation’ which simply means a fall in the price of commodities & services.
Inflation can be seen in a simple example of milk price: In 2012, the cost of a litre of milk is around Rs 30. Now in 2022, a litre of milk costs Rs 62. This is around 2 times the price increase.
This increase is not due to milk becoming a rare item to obtain, or more expensive to make. In fact, this price tells the gradual decrease in the value of money as a result of inflation.
Effect Of Inflation On Indian Economy?
Effect Of Inflation On Indian Economy
Effect Of Inflation On Indian Economy
Inflation in April is at its highest in the last 8 years & almost twice the RBI’s recommended value. Inflation has shaken the world. One of the major results of inflation is the slowdown of the economy. When this happens unemployment rate rises, the purchasing power of the consumer decreases, & credit becomes expensive. Due to this, the entire financial system of the country comes under stress. The rate of return on investment is falling behind the rate of inflation. Retail inflation in India stood at 7.79% in April 2022, This is the highest rate in the past 8 years. In July, it fell to 6.71%. However, the inflation still remains well above the Reserve Bank’s ideal level of 4% for the 6th consecutive month.
This inflation has caused price increases majorly for Indian kitchens. Besides the fuel & edible oil costs, domestic cooking gas prices have raised to a new level. In the past few months, prices of almost all essential items have increased. This is putting pressure on the budget of the common man’s household forcing the most to cut corners. In addition to this, the high fuel prices have had a bad effect on transportation & made it expensive.
The Russia-Ukraine war has become a serious threat to edible oil supplies, leading to an increase in its prices. Due to this palm oil imports have decreased.
How Stock Market Helps Beating Inflation?
Stocks: Investing in the stock market is a great option if you are looking for long-term, inflation-beating returns. If you are considering investing for the short term then stock investments are subjected to high risk and volatility. However, if you are considering an investment for a long time, the returns are usually higher than the inflation rate.
For example, during the start of the COVID-19 pandemic in March 2020, the Sensex dropped to 25,000 points & at the beginning of 2021, the market picked up & Sensex had crossed 51,000 points.
It is hard to calculate precise returns as it depends on the individual stock performance. But, if you create a diversified portfolio with carefully selected & highly credible stocks, in long term you are more likely to get returns that can offset the impact of inflation.
Stock Market
Stock Market
Equity Mutual Funds: If you want to invest in the stock market but don’t want to take the risk then you can choose equity mutual funds to protect your money against inflation. Equity mutual funds invest 60% of your money primarily in equity and related securities.
The average 5 to10 year returns are 10%. These mutual funds are managed by a fund manager who strategies to increase returns by creating a diversified portfolio. This fund manager then strategically spread your equity mutual fund investments across various sectors. Even though there is some risk associated with equity mutual funds, the risk is significantly lower than individual stock investments.
Another way to lower your risk is by investing in mutual funds through SIP. In SIP you contribute a fixed sum to the fund across a specific tenure at a pre-defined frequency mostly on monthly basis. The compounding effect of equity mutual fund investments will help you balance inflation. Some equity mutual fund investments such as ELSS (Equity Linked Saving Scheme) are tax-exempt.
Other Investments
Commodities: Investments in commodities such as precious metals, grains, oil, foreign currencies & natural gas is also a good option. It can help to overcome inflation because a rise in the inflation rate leads to a surge in commodity prices. However, commodity investments can be exceedingly volatile. The chances of inflation-beating returns are significantly high, but so is the risk of loss.
Real Estate: Investing in real estate can directly or indirectly provide a good fight against inflation. Real estate assets have good value, offer consistent income & are a natural shield against inflation. Real estate prices move with inflation because of their necessity. However, real estate assets are tough to convert into liquid funds. As an alternative, you can consider investing in real estate investment trusts (REITs). REIT is a company that owns and operates real estate assets.
Inflation is the biggest challenge and it can be overcome by investments. Equity has the potential to beat inflation in the long run. Investors move away from equity because of the risk of losing capital, however it is more important to be far-sighted than near-sighted. The volatility of equity returns is significantly reduced over the long run. Thus the stock market is very effective in beating inflation in long run. Our suggestion is to create a diversified portfolio.
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Tribe's Weekly
Tribe's Weekly

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