Invest in property, hedge inflation risk

Inflation has touched high levels. It soared past the seven percent mark pulling up with it prices of food, essential commodities and manufactured goods.

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 lock-in 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 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 hard-earned 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.

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.

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.