New-age Ways to Beat Inflation

If your income rises 10%, but inflation goes up 15%, you will have to lower consumption by 5% to ensure same level of savings. That is why a person’s investments should return more than inflation. Equities have generated more than the inflation rate over several decades. However, abnormally huge rise in value of cryptocurrencies and inflation-beating returns by peer-to-peer (P2P) lending and real estate investment trusts (REITs) have caught the fancy of investors over the last few years.

Besides capital appreciation, some of these new-age investments, such as REITs, can also generate stable income. However, considering that unlike equities, these do not have a long track record of highly impressive returns, is it wise to put money in them? Will they continue to shine? What are the risks involved?

Here’s the lowdown on popular new-age investments that can beat inflation.

Commercial Realty for Small Investors

Earlier, commercial real estate investing required a lot of capital. Not anymore. Innovative products such as REITs and fractional ownership are providing small investors an opportunity to take a bite of the commercial real estate pie. REITs pool money from small investors – as little as ₹10,000-15,000 – and invest in rental generating commercial properties. The rent is shared with investors. One reason for their popularity is low returns from residential real estate (2-3%).

Fractional ownership of real estate has also generated a lot of interest of late. Shiv Parekh, founder of fractional ownership platform hBits, says commercial real estate can return 8-10%, with internal rate of return of 13-20% and 5-10% capital appreciation. It is possible to take fractional ownership of a real estate asset for a little as ₹10-15 lakh. This works like REIT. Investors pool money to invest and get a share of income, that is, rental, and also gain from rise in property value. “Apart from monthly returns, price escalation may sometimes give overall returns of 16%,” says Parekh.

REITs, too, pool investor money and develop and/or own ‘income generating’ real estate. The aim is to give investors regular yield from rental income. The concept is still at a nascent stage in India, which has just three listed REITs. These REITs, Embassy, Mindspace and Brookfield, own Grade A office spaces and saw 99%-plus rental collections in H1FY22 despite the pandemic. Their corporate governance is also good. “REITs are run by global players that adhere to global standards and practices,” says Anuj Puri, chairman, ANAROCK Group.

The office market in India, says an ICICI Securities report, has several positives such as just 8-10 pan-India developers that can build quality rental assets. Analysts expect REITs to generate inflation-beating returns. “We estimate distribution yields of 6-8% over FY22-24E, along with 5-13% capital appreciation,” says Adhidev Chattopadhyay, research analyst, ICICI Securities. While rising interest rates are a risk, cumulative potential returns of 13-19% provide adequate valuation cushion, he adds.

Also, if inflation rises, rentals will be reset at renewal of rent agreements, says Sharad Agrawal, executive director, capital markets, Knight Frank India. “Capital values will also rise.” Experts, however, say commercial real estate is suitable only for patient investors due to low probability of outsized returns. “People looking for short-term investments should not consider fractional ownership as earning considerable returns takes a few years,” says Sudarshan Lodha, co-founder & CEO, Strata. He says REITs are listed on stock markets and, even though the minimum investment is low, valuations may fluctuate daily. “People with low risk-taking capacity should ideally stay away,” says Lodha.

Gold’s Irreplaceable Love

Indians hold an incredible 11% (21,733 tonnes) of the world’s gold. Gold has time and again cushioned investors from economic turmoil. Also, long-term returns have been higher than inflation. Over last 30-plus years, it has returned 10% a year on an average. In last one decade, yearly returns have been 11%. Consumer inflation has been rising 6.3% a year over last 10 years.

Over the last 30-odd years, silver has also outpaced inflation, just like gold. The white metal, in fact, outperformed gold by 12 percentage points in FY2021 by rising over 46%. Does that mean silver can replace gold as hedge against inflation? “If you see performance of silver over 31 years, from January 1990 to December 2021, it has had a CAGR of almost 9.70% in rupee terms, almost similar to gold,” says Hemen Bhatia, head, ETF, Nippon Life India Asset Management. However, it has returned 2% a year over the 10-year period, way less than inflation. This means silver is not as stable a store of value as gold. “Silver, after getting delinked from money supply, has been largely used in industrial applications and, therefore, has a high linkage with economic growth. It gives exposure similar to equities and commodities. It does not give diversification benefit like gold,” says Chirag Mehta, senior fund manager, alternative investments, Quantum AMC. Also, its price is more volatile than gold.

While precious metals have been around for ages, Mehta says new products such as gold exchange-traded funds (ETFs) are helping investors save on making and other charges. They are also easier to liquidate. GST pass-through is also a positive. “Advantages of purity, liquidity, convenience and regulation make it more suitable for investors,” says Mehta.

RBI’s Sovereign Gold Bond Scheme, which offers a coupon of 2.5%, plus benefit of price appreciation, is also one of the safest ways to invest in gold. Treat gold as a part of the portfolio that reduces risk over the long run as an effective diversifier. Investors, says Mehta, can allocate 10-15% funds to the yellow metal

Cryptocurrency: All Fired-up

GALA, an Ethereum token used as a medium of exchange between Gala Games participants, returned an astounding 50,000% in 2021. The biggest cryptocurrency in market cap, Bitcoin, delivered 61% returns in 2021, while Ethereum, the second biggest, grew over 400%. Digital tokens were the best performing asset last year, even though their legal status is still under a cloud. “If we look at bitcoin as an asset, it is far ahead of traditional assets like gold and real estate, which has resulted in a paradigm shift in investment patterns across the globe,” says Jay Hao, CEO of OKEx.com, the world’s second-largest crypto currency exchange in spot volumes.

Shivam Thakral, CEO of BuyUcoin, a homegrown cryptocurrency exchange, says users on his platform have always perceived crypto as an asset class. “We have witnessed average holding period of one-two years along with inter-crypto investment from a large number of investors,” he says.

Cryptocurrencies are expected to see wide adoption but investors should not get swayed by life-changing returns and replace existing equities with crypto products due to high short-term volatility, says Charles Tan, head of marketing at Coinstore, a Singapore-based crypto exchange.

In a universe of over 8,000 cryptocurrencies, Thakral says long-term investors can explore Bitcoin, Ethereum, Chainlink, Polkadot and Ewt, among others, to shield their investments from inflation. Stablecoins, like Tether, can also be a store of value. Charles Tan says look at top 10 cryptocurrencies according to market cap such as Bitcoin, Ethereum, BNB and SOL considering their expected widespread adoption and utility over the next few years.

P2P Boom

With an astonishingly high return of 10-12%, P2P lending has emerged as one of the most promising alternative investments due to adoption of digital technologies. An IndustryARC report says Indian P2P lending market is expected to reach $10.5 billion in 2026 by growing at a CAGR of 21.6%. P2P lending enables individuals to get loans from other individuals through facilitator websites.

“We disbursed ₹2,500-3,000 crore loans last year at an industry level,” says Bhavin Patel, founder & CEO, LenDenClub, India’s largest P2P lending platform. We expect to disburse ₹5,000-7,000 crore this year at an industry level, he adds.

The industry, which meets small cash needs of the unbanked in the least time possible, has attracted investor interest due to potential for earning high returns and diversified investment options. Faircent, the country’s first P2P platform to get RBI’s nod, offers 13.5% for minimal risk borrowers and 26.8% for unrated, very high risk borrowers.

While P2P is a great way to earn passive income, investors/lenders should be wary of defaults by borrowers, which could hit returns. For example, high-risk portfolio on Faircent offers between 21% and 27% but has a default rate of 8-9%. The low risk portfolio, which offers a relatively lower 14.5%, has a default rate of 3.1%.

Investors may look at some of these options depending upon their risk profile.