In an ideal world, every country would have a wide variety of inflation-proof investment options. Actually, in an ideal world, the perils of a high rate of inflation would simply not exist. But, as we all learn sooner or later, this world is far from ideal. And inflation is a fact of the real world. The good news is that there are financial instruments that can help you tackle the ill-effects of a rising rate of inflation.
Some of these instruments are already available in India; many of them are on offer in other countries and are yet to be launched here. All the inflation-protected products here are connected with insurance—life or health. Perhaps, in time, we will be able to buy inflation-protected securities and annuities, among other products that are now available only in developed markets.
Endowment options
Only SBI Life Insurance offers this option (in just one plan) so far, but it could gain popularity in these times. SBI Life calls it the COLA or Cost of Living Adjustment Option. It allows you to increase the sum assured by paying an additional premium; the life cover also increases during the period as added protection for the family. While this is the only product specifically structured as a hedge against inflation, there are insurance companies that allow you to increase the sum assured as your income grows, which can be an effective protection against rising rates of inflation. The loyalty bonus that most insurance companies give to the holders of endowment plans for staying on till maturity can also be used as protection against rising prices.
No-claim bonus
You pay your health insurance premium regularly so that if you ever need medical care, the bills won’t cripple you. If you have not availed of the insurance, the company generally rewards you for not making a claim. To protect yourself from the inevitable rise in healthcare costs, don’t opt for this bonus; instead, go for increased health cover.
The following instruments are only available abroad:
Inflation-linked certificates of deposit
Popular in the US, these certificates of deposit (CDs) provide investors with inflationary protection by offering annually variable interest rates that increase or decrease with changes in the consumer price index (CPI).
Treasury inflationprotected securities
Known as TIPS in the US, and as real return bonds (RRB) in Canada, inflationindexed securities, like ordinary securities, pay interest every six months, and the principal, when the security matures. To compensate for inflation, the coupon payments and underlying principal are automatically increased in accordance with the changes in the CPI. The downside is that the return on these instruments is low.
Inflation derivatives
Many investors (in the countries where these instruments are available) prefer inflation protection from derivatives because unlike inflation-indexed bonds, they don’t call for substantial amounts of capital. The most common derivatives are swaps, and inflation derivatives require buyers to provide a small premium to the swap provider.
Inflation-protected annuities
These instruments are ideal for times such as these when investors are worried that inflation will eat into their purchasing power as they age. These annuities guarantee a real rate of interest that is at or above the rate of inflation (measured by the CPI).
