How To Succed In The Investment Game During Inflation?
Investing gives the impression to rank rather low on the list of priorities for the generation of today. Unlike the earlier generations who saved money today for a better tomorrow youngsters today are focused more on spending money rather than saving. One wonders why? Is it because we live in a world so focused on the here and now, that planning for the distant future seems like a nonessential task? Or is it the innumerable choices between buying individual stocks and the myriad of different mutual funds is so confusing and intimidating that they rather not do it at all? Whatever be the reason, the fact remains that saving early on can help build a large corpus to see through the golden years of life. Investing is the best way to secure your future.
In the normal courseOf any business activity, it is a known fact that, there are two ways to earn income; one is to exchange your labour for money and the other is to have your money earn money for you. The ability to exchange labour for money decreases as we grow old and at that juncture having an investment corpus that can earn money will ease the burden to a great extent. Hence it is important that every youngster feels responsible enough to plan for that inevitable event now as it is the first step towards self reliance.
Time is the most powerful asset when it comes to investing. Many young people have a short term and erratic approach to investing. They feel that investing is all about parking your surplus funds till the next time you need it. Investing cannot be taken lightly. It is a long-term process that requires a consistent and systematic approach. Investing should be thought about in terms of years or even tens of years rather than in months. Returns get compounded if invested corpus remains untouched for years.
For example, if an investor had subscribed to 100 shares in Infosys IPO at Rs.9500 the value of this investment would have been approximately Rs.2.6 crores today. The majority of successful investors have realized that investing consistently over the long-term gets the best returns. So there is an urgent need to change youngsters' perspective towards investing.
Focus on inflation adjusted returns:
Inflation is a silent killer that quietly eats into your returns. Surprisingly many investors are unaware the impact of inflation on their portfolio. Money kept in a "savings" account is earning interest at rates that don't even keep pace with inflation. For example if the inflation is 11 percent and the return on investment is 7 percent, then your investment portfolio is eroded by 4 percent every year; and instead of making money you are losing money every year. As a young investor you have the ability to increase the allocation to riskier assets like equities to get those extra returns to beat inflation. You have to construct a portfolio to include all types of assets risky and otherwise depending on your risk bearing capacity.
All assets come with their own risk return mapping. Understanding these risks is the first step toward minimizing them. As you learn more about each asset and its risk profile you will be in a position to decide how much risk you want to take and conversely how much return you need to make. With adequate knowledge it is possible to make 10-15 percent annual return on your investment with minimal risk.
To begin your investment journey you need to know a few basics tenets of investing. How returns are generated, how an asset becomes risky, how you can use diversification to mitigate risks are some of the fundamentals you should know before you start investing. For the average person, investing especially in stocks can be a mystery.
Terms like P/E ratio ROCE and PAT can be a bit confusing to say the least, but in reality, about as simple to understand as basic arithmetic. The philosophy behind the analyzing company's financials is to the judge the ability of the company to generate superlative returns. Finally it is a company's performance that dictates its stock prices.
Having discussed the need for investment in securities in capital market, it is essential to review some of the major factors that are expected to influence the inflation rate movements in short term to medium term investments.
IMPACT OF INFLATION ON GROWTH OF INVESTMENT: Investor should aware of the causes and effects of inflation and its impact on the investment in capital market.
The Wholesale Price Index (WPI) based inflation rate is rising steeply ever since it came into positive territory in SEP 2009. During the month of Feb2010, WPI-based inflation was reported at 8.5 percent Analysts believe the inflation rate is likely to remain firm in the medium term mainly due to last year's low base effect and other driving factors such as high food price inflation, recovery in the global economy and high liquidity.
Food articles inflation:
Inflation in food articles is one of the main drivers of the WPI inflation. Food articles inflation was triggered by a shortfall in the monsoon last year. Analysts are expecting a good monsoon this year due to the fading of the El-Nino effect.
Although there are remote chances of any major softening in prices, last years' base effect coupled with a good crop this year is expected to bring down the inflation rate in the next few months. Therefore, the monsoon is an important factor.
Commodity prices:
The prices of commodities are expected to come back as the global economy is slowly getting back to the growth path. Crude oil, metals and precious metals like gold and silver have already gone up quite significantly in the recent past. Higher prices of these commodities abroad will have a cascading effect on other commodity prices, and hence result in higher inflation.
Liquidity:
High liquidity and higher disposable incomes are other factors that would keep the inflation rate firm in the medium term. The spending on the government's fiscal stimulus packages and fund inflows from foreign institutional investors (FIIs) has resulted in a surge in liquidity in the economy. The tax cuts will put more money in the hands of consumers.
In short, the inflation situation does not look like it will come under control in the near term. The implications of a higher inflation rate are quite widespread. Some of the implications are enumerated below:
Harder interest rates:
The Reserve Bank of India (RBI) has already started a tightening in the monetary policy. Although the RBI has indicated that the interest rates would be increased slowly, in a phased manner, many analysts believe the current scenario of soft interest rates is not going to last long. The RBI could trigger a rate hike in its policy review next month.
A rise in the inflation rate impacts market sentiments. A higher inflation rate helps in driving the interest rates higher and hence borrowing becomes costly both for the market or financial institutions. Therefore, the valuations of capital-intensive companies and sectors come under pressure as their margins decrease due to the higher interest burden.
However, the markets are governed by many factors and the direction cannot be determined by reading just one factor. Global sentiments and global funds inflows are other crucial factors that impact the direction of stock markets significantly.
Primary Commodity prices:
The prices of many essential and primary commodities have shot up quite significantly in the last one year. The prices of basic food commodities are still hovering near the 20 percent mark. All income categories are facing the brunt of rising prices. Inflation hits retired people and those with fixed incomes very badly. Uncontrolled inflation destabilizes the economy as consumers and investors change their spending habits. The government and the RBI are working on measures to control the inflation rate and it is important for investors to track the developments around inflation to get a feel of the direction of the economy.
Information is the key to investment success as you begin this journey towards self-reliance.
In the normal courseOf any business activity, it is a known fact that, there are two ways to earn income; one is to exchange your labour for money and the other is to have your money earn money for you. The ability to exchange labour for money decreases as we grow old and at that juncture having an investment corpus that can earn money will ease the burden to a great extent. Hence it is important that every youngster feels responsible enough to plan for that inevitable event now as it is the first step towards self reliance.
Time is the most powerful asset when it comes to investing. Many young people have a short term and erratic approach to investing. They feel that investing is all about parking your surplus funds till the next time you need it. Investing cannot be taken lightly. It is a long-term process that requires a consistent and systematic approach. Investing should be thought about in terms of years or even tens of years rather than in months. Returns get compounded if invested corpus remains untouched for years.
For example, if an investor had subscribed to 100 shares in Infosys IPO at Rs.9500 the value of this investment would have been approximately Rs.2.6 crores today. The majority of successful investors have realized that investing consistently over the long-term gets the best returns. So there is an urgent need to change youngsters' perspective towards investing.
Focus on inflation adjusted returns:
Inflation is a silent killer that quietly eats into your returns. Surprisingly many investors are unaware the impact of inflation on their portfolio. Money kept in a "savings" account is earning interest at rates that don't even keep pace with inflation. For example if the inflation is 11 percent and the return on investment is 7 percent, then your investment portfolio is eroded by 4 percent every year; and instead of making money you are losing money every year. As a young investor you have the ability to increase the allocation to riskier assets like equities to get those extra returns to beat inflation. You have to construct a portfolio to include all types of assets risky and otherwise depending on your risk bearing capacity.
All assets come with their own risk return mapping. Understanding these risks is the first step toward minimizing them. As you learn more about each asset and its risk profile you will be in a position to decide how much risk you want to take and conversely how much return you need to make. With adequate knowledge it is possible to make 10-15 percent annual return on your investment with minimal risk.
To begin your investment journey you need to know a few basics tenets of investing. How returns are generated, how an asset becomes risky, how you can use diversification to mitigate risks are some of the fundamentals you should know before you start investing. For the average person, investing especially in stocks can be a mystery.
Terms like P/E ratio ROCE and PAT can be a bit confusing to say the least, but in reality, about as simple to understand as basic arithmetic. The philosophy behind the analyzing company's financials is to the judge the ability of the company to generate superlative returns. Finally it is a company's performance that dictates its stock prices.
Having discussed the need for investment in securities in capital market, it is essential to review some of the major factors that are expected to influence the inflation rate movements in short term to medium term investments.
IMPACT OF INFLATION ON GROWTH OF INVESTMENT: Investor should aware of the causes and effects of inflation and its impact on the investment in capital market.
The Wholesale Price Index (WPI) based inflation rate is rising steeply ever since it came into positive territory in SEP 2009. During the month of Feb2010, WPI-based inflation was reported at 8.5 percent Analysts believe the inflation rate is likely to remain firm in the medium term mainly due to last year's low base effect and other driving factors such as high food price inflation, recovery in the global economy and high liquidity.
Food articles inflation:
Inflation in food articles is one of the main drivers of the WPI inflation. Food articles inflation was triggered by a shortfall in the monsoon last year. Analysts are expecting a good monsoon this year due to the fading of the El-Nino effect.
Although there are remote chances of any major softening in prices, last years' base effect coupled with a good crop this year is expected to bring down the inflation rate in the next few months. Therefore, the monsoon is an important factor.
Commodity prices:
The prices of commodities are expected to come back as the global economy is slowly getting back to the growth path. Crude oil, metals and precious metals like gold and silver have already gone up quite significantly in the recent past. Higher prices of these commodities abroad will have a cascading effect on other commodity prices, and hence result in higher inflation.
Liquidity:
High liquidity and higher disposable incomes are other factors that would keep the inflation rate firm in the medium term. The spending on the government's fiscal stimulus packages and fund inflows from foreign institutional investors (FIIs) has resulted in a surge in liquidity in the economy. The tax cuts will put more money in the hands of consumers.
In short, the inflation situation does not look like it will come under control in the near term. The implications of a higher inflation rate are quite widespread. Some of the implications are enumerated below:
Harder interest rates:
The Reserve Bank of India (RBI) has already started a tightening in the monetary policy. Although the RBI has indicated that the interest rates would be increased slowly, in a phased manner, many analysts believe the current scenario of soft interest rates is not going to last long. The RBI could trigger a rate hike in its policy review next month.
A rise in the inflation rate impacts market sentiments. A higher inflation rate helps in driving the interest rates higher and hence borrowing becomes costly both for the market or financial institutions. Therefore, the valuations of capital-intensive companies and sectors come under pressure as their margins decrease due to the higher interest burden.
However, the markets are governed by many factors and the direction cannot be determined by reading just one factor. Global sentiments and global funds inflows are other crucial factors that impact the direction of stock markets significantly.
Primary Commodity prices:
The prices of many essential and primary commodities have shot up quite significantly in the last one year. The prices of basic food commodities are still hovering near the 20 percent mark. All income categories are facing the brunt of rising prices. Inflation hits retired people and those with fixed incomes very badly. Uncontrolled inflation destabilizes the economy as consumers and investors change their spending habits. The government and the RBI are working on measures to control the inflation rate and it is important for investors to track the developments around inflation to get a feel of the direction of the economy.
Information is the key to investment success as you begin this journey towards self-reliance.
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