Wealth protector

Rising inflation and interest rates do not go well with the equities market as interest-sensitive sectors like real estate,banks,consumer goods and auto underperform the benchmark in such a scenario. Investors tend to sell during such crisis but analysts say that over a long term,despite the short-term cyclical fluctuations,returns generated from equities supersede other asset classes. So,it is very important that a retail investor does his research well and has a diversified portfolio of stocks or invest in a diversified equity fund without a sector or industry bias.

Rajesh Krishnamoorthy,managing director of iFAST Financial,says that in a high growth and developing economy like ours,inflation would continue to remain a worry. “While efforts are made by the central bank and the government to keep the price rise under check,we need to safeguard ourselves against the demon of inflation which smartly keeps reducing the value of our savings,” he underlines.

Typically,real estate,infrastructure and power companies which require huge liquidity to supplement their long gestation plans are affected the most when interest rates move up. In contrast,sectors like pharmaceuticals continue to remain the most defensive sectors and companies that produce primary goods benefits from the price rise. Even the IT sector remains unaffected with high inflation and certain fast moving consumer goods companies continue to post healthy results. As a part of portfolio rebalncing,short-selling is a good way to ensure profit booking when the markets are volatile. In a volatile market,price of stocks moves too frequently and investors need to take some risk after consulting their stock broker and fund managers.

Analysts suggest that investment in commodities can also be a good way to rebalance the portfolio. I f an investor is not looking at directly investing in the commodities market,he can take the route of commodity funds which invest in companies related to precious metals like gold and silver,energy stocks,metal and mining industry,etc. However,the caveat is that commodity prices are highly cyclical and are subject to macro-economic policies of the government and demand and supply factors. Investors need to take a call on the time period of the investment to avoid any cyclical downturn. Also,in case of global commodity-based funds,currency risk plays a major spoilsport which investors will have to factor in.

Gold has always been a good hedge against inflation and has always been a favoured by retail investors in India in jewellery form. At present,the steep rise in gold prices is owing to the slow recovery in the developed markets. However,since gold in physical form does not provide any interest income like in the case of fixed deposits,nor does it pay any dividends like in equities,one has to wait for the metal to appreciate before selling it.

Broadly,there are different ways one can rebalance one’s portfolio by selling off investments from over-weighted asset classes to under-weighted asset categories. Analysts say during high inflation,a retail investor should look for a portfolio rebalancing every six months and even factor in the effects of taxation and exit loads in case of mutual funds.