It is no news that COVID-19 continues to be a cause of concern for the Indian economy. Given, high chances of a detestable third wave, many fear a rise in inflation can cause great harm to the economy. The high inflation can materialize due to supply-side constraints owing to lockdowns in various parts of the country.
As economics explains it, Inflation has a direct impact on your living expenses. This is due to the fact that you have to spend more to maintain your current standard of living, as the purchasing power of your money plummets. On the other hand, the effects are moot if your income increases at the same time, given the current state of the economy. But in certain cases, even if your income does increase, it is unlikely to keep pace with inflation. This is when the rate of increase in your income is lower than the rate of increase in inflation.
Talking about the impact on your savings, increased spending without corresponding increase in income would mean lower savings to meet life goals. This indirectly leads to a secondary effect on your life goals, which are all susceptible to the inflation risk.
Additionally, as inflation rises, there is a significant possibility that your investment may not earn the required return. Thus, inflation risk affects everyone whether you are a working executive or a retiree.
But is there no way that inflation can be battled? Perhaps there is. The best way to moderate inflation risk is to invest in inflation-based products. This is due to the fact that some products provide returns to protect your purchasing power. For example there are Treasury Inflation Protection Securities (TIPS) offered by US. But sadly for India, similar retail products are yet to be made available in the country. In the absence of such high returns products in India, you have to directly trade in commodity futures such as crude, copper and zinc.
Alternatively, there is a less-preferred choice to trade in momentum stocks. It is to be noted that Momentum stocks are those stocks that have been rising for a while and are expected to continue their uptrend in future. According to reports, such stocks produce positive returns but have the tendency to decline sharply when the market turns. But the catch is to get high returns on these stocks in quick time. But all that comes fast, withers away faster. Therefore, the risks associated with this investment are quite high. Thus, alternatively, one can consider buying shares of commodity-based producers and financial services companies as commodity producers ought to do well when the commodity prices increase.