Here’s how to protect debt returns as inflation worries spike
PremiumIn the current rate scenario, it would be prudent to go for short-term investment options, say experts
After remaining non-existent for the past few years, inflation fears have resurfaced in the global markets. Several global institutions and thought leaders from Deutsche Bank to US treasury secretary Janet Yellen have said that inflation may rise ahead.
In India as well, inflation fears have come up. According to Crisil Ltd, significant cost-push pressures on account of surging international commodity prices and supply disruptions have raised the cost of production for manufacturing companies.
MORE FROM THIS SECTIONSee All
“Upside risks on inflation are growing from surging international commodity prices. While producers are bearing a greater burden of rising input costs for now, these could get passed on to retail prices once demand recovers. Food inflation could also face pressure from disruptions to the rural economy due to the pandemic’s spread and rising global prices," the ratings agency said in a note.
impact on debt investments
A rise in inflation is expected to impact returns from your debt investments.
“Whenever inflation rises, we have to review our goals and plan accordingly. As a thumb rule for financial planning, a person must track how the inflation trend is in terms of their own expenses. That would be the real inflation for an individual," said Nishith Baldevdas, founder of Shree Financial and a Sebi-registered investment adviser.
Experts believe that down the line, when things normalize and covid-19 pandemic goes away, we may see interest rates increasing.
time to change strategy?
From an investors’ perspective, there’s no need to change the strategy of investments in a big way.
“We need to keep in mind that we have been through a phase where interest rates have continued to be very low and that too for a very long time. At the same time, a lot of liquidity was pushed across the globe. Only some corrective measures are expected now. However, when inflation goes up, it adds to your equity returns. It is much better for investors to continue with their current allocation," said Harshad Chetanwala, a Sebi-registered investment adviser and co-founder of MyWealthGrowth.
However, there might be a need to slightly adjust your debt investments. In the current rate scenario, it would be prudent to go for short-term investment options. Investors should avoid committing to a three- to five-year investment horizon for fixed-income instruments.
“Instead, investors should look at six-month to one-year kind of deposits, rather than locking into long-term maturity instruments, because as soon as interest rates rise, the current savings are going to take a hit as their value is going to come down. FDs (fixed deposits) are already not beating inflation," Chetanwala added.
Remember that individuals should only keep that money in fixed deposits, which is in contingency or absolute near-term requirement.
Investors who are willing to lock in their money for a long period and want fixed returns can look at small savings schemes. The rates on small savings are generally held above bank FD rates.
Small savings come with different tenors. For example, National Savings Certificates have a rate of 6.8% and a tenor of five years. The Public Provident Fund (PPF) rate is 7.1% and it has a term of 15 years.
The government reviews the rates on small savings schemes every quarter. Several small savings schemes, including PPF and NSC, also carry tax benefits.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!