Happy Sankrant, Happy Pongal, Happy Lori……in short if you are from the West of the country, North of the country, or South of the country, happy new year!!

For the Tamilians, Puthandu Nal Vazthugal…!!

Continuing yesterdays post…assets that protect you against inflation….

Real Estate

Traditionally real estate has been considered a very effective hedge against inflation. That is all there is to it! However the profits of a company that deals with real estate or owns land banks can be considered some kind of a hedge against inflation. Currently real estate prices have been fluctuating and it is impossible to find a good proxy for the real estate in the country. However, if inflation takes hold real estate prices could turn around and start rising. REITs when introduced can be a good hedge against inflation.

Real Estate and Commodity Companies

Like real estate companies, the profits of commodity companies closely relate to the prices of the commodities the company produces. Energy, sugar, cement, metals, materials, and many other subsectors fit into this category. A commodity sector ETF – or a mining ETF could be diversified more evenly across industries and is probably the easiest way to gain exposure to this sector. However a gold ETF is different from a company dealing in equity shares of companies in the mining business. It is always felt that the company is likely to go up faster than a pure commodity ETF – because of the leveraging and the impact of the Price earning ratio on the price of the share.

Foreign Bonds

Foreign bonds are a good way to protect against a decline in the local currency. So if all your assets are denominated in Rupees it is worthwhile looking at a foreign currency exposure. Obviously investing in the US and UK (contrarian investing style) is a better option than investing in the Asian market. India behaves too much like other Asian countries – so it is not a great hedge. Sadly not enough of foreign bonds are available in the Indian context. However for people with access to good investment advice a foreign ETF – like an international treasury or corporate bond ETF should be a good investment vehicle. With such an ETF you can have some exposure to foreign currencies at the same time as protecting those foreign currencies from inflation.

These are all good assets to invest in to protect against inflation, however, to protect against the possibility of increased deflation in the near term, cash is probably the best option.

Normally, I would include hold to maturity Government Securities as a savings vehicle  that benefits from inflation. However the government seems to have no control on its finances – the PSU disinvestment is likely to be used to bridge the budget deficit. This poor behavior of the government brings considerable long-term downside risk to the bonds. If the government finances the economic stimulus by issuing more bonds, then it may oversupply the G-Sec market with new debt, causing prices to decline substantially. Clearly if you have some excess money and do not mind some risk you could buy and hold to maturity some Central Government securities.

In the Indian context where we do not have any social security measures we have to look at the Senior Citizen Yojana as some kind of a subsidized scheme where the government of India pays a little more interest than the prevailing inflation rates. However it is open only to senior citizens (defined as persons above the age of 65 years).

Retirement planning, planning for children’s education, and such longer term planning gets a little tricky. A good thing to do would be to put about 80% in equity and the balance in debt. Closer to the date of withdrawal (say 5 years from the date on which you need it) start withdrawing 15% every year from equity schemes and putting it into the debt schemes. This kind of an asset allocation will protect you against inflation and let you get the benefit of being in equities.

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  1. Do you think Commercial Real Estate can be a good retirement solution. It would give a regular inflation adjusted return as rent year on year & also its principal value would keep on increasing or at least keep pace with inflation.

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