Inflation refers to the situation in which there is sustained increase in prices of goods and services leading to decline in people’s purchasing power. Due to inflation, the value of money decreases over time. Sakshi Batra gets you some insights on how the current inflation is impacting investments in different asset classes

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LEARN ABOUT: Investing During Inflation

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Inflation is one of the most important factors that impacts investments. Whether it is a savings account or a stock portfolio, inflation can significantly affect the returns of an investment.

Inflation is defined as the rate at which the general price level of goods and services in an economy increases over time. It means that the same amount of money can buy fewer goods and services as time goes by. For instance, $100 today would have significantly less purchasing power than $100 ten years ago.

Inflation can be harmful to investments in different ways. Firstly, it can lead to higher interest rates. As prices rise, investors demand higher returns to compensate for the loss of purchasing power. So, when the inflation rate increases, central banks tend to raise interest rates to maintain price stability. This, in turn, leads to higher borrowing costs for companies that need to invest in new projects, and this can slow down the overall economic growth.

Secondly, inflation has an adverse impact on the real value of fixed-income investments, which include bonds and other fixed-income securities. These financial instruments are popular among investors as they offer a fixed rate of return. However, the fixed rate of return is impacted by inflation. For example, if an investor purchases a bond that has a 2% annual coupon rate, but the inflation rate is 4%, then the investor is losing money, as the real value of the money invested will decrease by 2%.

Inflation can also have a positive impact on some types of investments. For example, companies that own real estate or commodity businesses may benefit from inflation. As prices rise, the value of real estate and commodities also goes up, and these assets may offer a way to offset the impacts of inflation.

Investors can mitigate inflation’s impact by investing in assets that have an intrinsic value that is resilient to inflationary pressures. For instance, owning gold or investing in real estate can help diversify one’s portfolio and hedge against inflation risk.

In conclusion, inflation’s impact on investment cannot be ignored. Investors need to be aware of the impact of inflation when making investment decisions. Diversifying investments, investing in assets that have a tangible value, and keeping an eye on the inflation rate can help mitigate the negative impact of inflation on investments.