Recalibrate the investment strategy to adapt to rising inflation

May 2022 was an eventful month as the Reserve Bank of India (RBI) surprisingly increased the benchmark repo rate by 40 basis points. Financial markets were quick to react to the RBI’s action. The benchmark 10-year bond yield of 6.54% to 2032 rose 26 basis points to 7.3783% on the day of the rate hike. The stock market, still reeling from the rate hike, was shaken again when data showed consumer price inflation accelerating at the fastest rate since 2014. retail jumped to 7.79% in April, which weakened financial markets. On May 13, the Nifty 50 fell to 15,782, 13% lower than its April 4 close.
If the experts are to be believed, the worst may not yet be over, as the latest inflation figures do not take into account the impact of high commodity prices. Inflation is now the top priority for central banks around the world. On the investors’ side, the rise in inflation resulting in a drop in purchasing power is now the pivot of the recalibration of the investment strategy.

Why should we turn to debt mutual funds?
We believe we have entered a regime of rising inflation which requires a recalibration of investment approach and strategy. Investors with a relatively low appetite for risk may consider exposure to debt mutual funds, especially long-duration funds. The yield on 10-year G Sec bonds, currently hovering above 7.39% (as of May 23, 2022), could rise to 8% absent RBI intervention. LICMF offers several options in this category such as LICMF Bond Fund, LICMF G-Sec Fund and LICMF G-Sec ETFs. We can consider blocking the capital when the yields approach 8%.

Inflation should keep equity markets nervous in the near term. Investors with a relatively high appetite for risk can look to equity mutual funds like a LICMF Large Cap fund or a LICMF Large & Midcap fund. Investors with a relatively low appetite for risk may consider investing in the LICMF Balanced Advantage Fund (LICMFBAF), LICMF Debt Hybrid Fund and LICMF Equity Hybrid Fund. In LICMF BAF, the fund invests in a combination of equity and debt instruments and asset allocation is done dynamically based on market trend and valuations. The Balanced Advantage Fund Class can succeed in highly volatile markets.

Why can we look at Equity Mutual Fund?
The Indian stock market is trending up when looking at a longer term horizon. On the global front, India is the fastest growing economy. Our macroeconomic indicators are better than those of many other emerging markets. India is the preferred investment destination for FIIs who face low GDP growth and high inflationary pressure in their host country. Domestically, India enjoys a large consumer base, favorable demographics of a population younger than any other country, a growing explosion in rural demand coupled with a phenomenon of excessive purchases of the urban population. Rising income levels and expanding upper middle class segment will drive growth going forward. All these aspects make India a strong argument for the future economic superpower. India is ready for an upward movement.

In conclusion, retail investors should be aware of rising inflation and its impact on their income and wealth. Investors must be equipped with an investment strategy to combat the ghost of the past, i.e. the rise in inflation caused by the pandemic. One option might be to invest in a stock mutual fund that has a proven track record of delivering returns above inflation. Investors with a relatively low risk appetite can look to the Balanced Advantage fund or other hybrid categories for investing. While investors with the lowest risk appetite can consider debt funds. Ultimately, the retail investor’s only goal should be to invest money in assets that increase the value of their money faster than the devaluation caused by rising inflation. Investing through SIP is the easiest way to benefit from market volatility and create long-term wealth creation.


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