How to Invest in Deflationary Times

By | May 26, 2012
With rising fears that the economy may move towards deflation, especially since the wholesale price index is fast moving towards zero, there is no denying that the economy is in a state of fear. With the arrival of deflation, there is an immediate and urgent need to change your current strategies of investment. This is because all your current investments aim at beating inflation out of the way, and with the oncoming of inflation, it is mandatory to introduce a change of plans in investment. In the normal course of investments, investors are always advised against sitting on liquid funds without investing them as it primary leads to stagnation. However, in the case of a deflated economy, it makes absolute sense as the same amount of money that you possess in the form of liquid cash will have an increase in its value. Currently, while deflation is still viewed as a far-fetched phenomenon, especially since the prices of food and essential commodities are still sky high, investors can shift their focus to debt-related instruments.
With the country going through a low inflation phase, the wholesale price index has seen a sharp decline. Retail inflation, on the other hand, is said to follow suit after some lag in time. Low rates of inflation lead to lower rates of interest, creating a positive impact on customers and demands by the corporate sector. Hence, if you are seeking to make an investment for a time frame of 2 to 3 years, then equity investments can be a profitable idea and you can diversify your portfolio by making the rest of the investments in debt instruments. If you want to make investments for a time frame that is less than 2 years, then your portfolio must consist of all debt instruments. This is because debt instruments tend to perform extremely well owing to a fall in interest rates. You can hold these investments for a time frame of around 1 – 2 years as volatility due to a fluctuation in interest rates can be expected. If you fall in the lower tax brackets, then fixed deposits should be your ideal mode of investments. On the contrary, if you belong to the higher tax bracket, then invest in Fixed Maturity Plans or FMPs as they would prove to be more viable to your interests. It is never a wrong time to invest. Consider it as a much better opportunity than taking a personal loan or a car loan at high rates of interest to finance your requirements.
By investing in FMPs for approximately a year or longer, long-term capital gains tax of 10% or more will be applicable on your returns. This is in case you choose to not consider the indexation for your account. If you prefer indexation towards the cost of your acquisition, then a 20% tax in addition to surcharges will be applicable on your returns. Look for an investment option that best suits your needs and requirements, including an option that least bothers your tax outgo. Although fixed maturity plans are far more tax compliant than fixed deposits, they are subject to a lot of market risks. Take the global market scenario in mind and choose relevant investments. For instance, for at least the next few months, investment in gold is said to be quite a wise option. Since the United States of America has taken a lot of monetary steps that may lead to inflation, including the US Federal Reserve’s decision towards bank fundings and other bailouts, a situation of high inflation is not very far. Thus, gold prices are expected to remain high for the next few months, and thereby, making investments in them would be a smart move. Invest only a part of your portfolio in them to add to your fund’s diversification.
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