Focus On Real Rate Of Return

It is a proven fact that investing is a simple yet challenging process for investors. It’s simple because there are well-established investment principles. However, the level of investment success that one may achieve depends upon how one tackles the challenges through one’s defined time horizon. These could be choosing the right mix of assets in the right proportion, ensuring that investments remain on track to achieve investment goals over short, medium and long-term, and beating inflation consistently to earn positive real rate of return.

If you are a serious investor, you must keep an eye on these challenges and have a strategy to tackle them. While tackling all these challenges is important, earning positive real rate of return i.e. post-tax returns minus inflation can be quite tricky as inflation can cause the most damage to the value of your hard-earned money year after year.

Therefore, make sure that you don’t ignore the threat of inflation while investing. Once you recognise the importance of defeating this evil called inflation, all your dreams of leading a comfortable retired life, providing the best education to your children, owning a comfortable house, and having a few other things that could facilitate a particular lifestyle can become a reality.

However, winning over this dangerous evil is not an easy task. The only way you can stay ahead of inflation is by planning your investment and making an asset class like equity an integral part of your portfolio in different proportions. In other words, by making a few sacrifices today, you can lay a foundation for a better tomorrow.

While inflation is usually perceived to be a risk for medium and long-term investments, it is equally important to keep an eye on it even while making short-term investments. Though beating inflation during the short-term can be quite a difficult task, one can certainly take steps to minimize the damage it can cause to one’s hard-earned money.

You must have a clear strategy for tackling low as well as high inflation regime. An important aspect of a high inflationary environment is that although it can have a damaging impact on your wealth, investments remain attractive if you invest wisely. Similarly, if you are one of those investors who parks a large sum of money in savings bank account, investing in potentially better and more tax-efficient options such as arbitrage funds can be a much better option.

Similarly, if you intend to invest in equities for the long-term, the depressed state of the stock market during high inflationary periods provides a good opportunity to invest at attractive levels. However, considering that timing the market can be quite a difficult task, a disciplined investment approach allows you to invest at lower levels, thereby bringing your average cost down.

As is evident, keeping focus on earning positive real of returns holds the key to achieving investment success on a consistent basis. Here is what you need to do to earn positive real rate of return:

Plan your investments: The first step towards achieving the positive real rate of returns is to have an investment plan in place. Though it can be quite a challenge to develop a strategy that not only withstands the turmoil in different markets but also help in achieving short-term as well as long-term investment objectives, you can achieve the desired results by focusing on the correct asset allocation. 

Invest in equities: One of the asset classes that have the potential to beat inflation over the longer term is equities. However, investing in equities would mean taking higher risk as compared to some of the instruments that give pre-determined or stable returns. Thankfully, there are strategies like ‘systematic investing’ that can help you in tackling the risk of volatility to a large extent. Similarly, if you have a lump sum but may not like to invest the entire amount at a particular market level, investing through a Systematic Transfer Plan (STP) can be the right way to benefit from averaging. Remember, any gains made on units/stocks sold after one year is tax-free.

Follow a tax-aware investment strategy: Considering that inflation eats into a substantial part of returns over the years, tax efficiency of the investment options plays a crucial role in improving the real rate of return in the long run. The tax efficiency becomes even more important when one plans to achieve medium to long-term investment objectives like children’s education, buying a house, and retirement planning.