For any investor, inflation would be among the most uncomfortable economic situations. The future is extremely unpredictable, and inflation can significantly diminish the purchasing power of an investor. As Kavan Choksi says, investing during inflation becomes extremely complex as the traditional investment playbook of putting money in the market when it is cheap and steering clear when it is expensive becomes harder to execute in an inflationary environment.
Kavan Choksi provides insights into how to navigate portfolio during inflationary times
Inflation makes the market highly volatile. In such situations, a large number of investors are likely to get wary and end up parking their investments in debt instruments like long-duration funds. Such funds invest in long-term-fixed-income securities that have an average maturity period of more than seven years. Exposure, however, to long duration funds can lead to losses, as they are way more susceptible to interest rate hikes.
If an investor wants to invest in debt funds, short duration and liquid funds shall be smarter choices. Short-duration funds ideally invest in money market securities that mature in one to three years, while liquid funds invest in securities maturing in 91 days. As the maturity period of the core-underlying portfolio is low, they are highly prone to risks that arise owing to a hike in interest rates.
Businesses under high debt often find things difficult during high inflation. The situation further worsens for a company dealing with losses, and investors must try to avoid investing in the stocks of such businesses. Investors must go back to the basics and focus on evaluating the financials of a company before investing. They should go through its balance sheet properly and check the amount of debt. If the debt amount is too high, it is better to stay away.
Very often, the prices of thematic stocks go down during an inflationary environment. This excites the investors and encourages them to add the shares to their portfolio. But doing so can prove to be pretty expensive. It is important that investors understand that stocks that well in the past may not be able to sustain themselves in the future. Therefore it is not a smart idea to invest in thematic stocks. If investors desire to put their money in stocks, they should try to find companies that can retain the pricing power of their goods.
According to Kavan Choksi, sticking to the stocks of large cap companies is a smart way to mitigate the inflation threat. They are considered to be a dominant player in their segment and are better structured for weathering the storm. Even though returns from stocks may not be too impressive, they do offer a portfolio with much needed liquidity and stability. Comparatively, small and mid caps is a riskier choice, even though they have the potential to provide improved returns than large caps.
Choosing to invest in balanced advantage funds is a nice way to counter the impact of inflation and the subsequent volatility induced by it. BAFs or balanced advantage funds generally invest in equity and debt. They tend to shift dynamically between them based on the prevailing market conditions as per a predetermined model. Such a model can be either trend-based or valuation-based
