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UAE: 7 ways to protect your money during inflation

Higher transport costs and food prices are having a cascading effect on monthly budgets

The ongoing global heatwave has a formidable competitor too: red hot global inflation. As soaring summer temperatures set new records across the globe, record high inflation rates are also being registered.

The UAE is also feeling the pain of rising inflation. According to data on inflation rates from Dubai Statistics Center, based on year-on-year changes in prices, after plumbing the lows of -2.80 per cent per annum (p.a.) in May 2021, inflation sharply rose to 4.7 per cent p.a. in May 2022. The major culprits: higher transport costs and food prices.

How inflation devours your present and future

Inflation is not just about sudden and painful realisation of having to dig deeper into your pocket to pay more. Sustained high inflation also harms your family’s financial future.

Healthcare and higher education costs typically rise much more than general inflation. Thus, you need to save more for them. High inflation typically pushes up interest rates, making new loans more expensive and typically results in higher monthly loan payments and total interest payouts during the loan term.

In the UAE, based on information from leading bank and home loan comparison websites and depending on the loan being provided to a UAE national or an expatriate, home loan rates have broadly risen from about 2.5 per cent p.a. in 2021 to 3.0-3.5 per cent p.a. The recent home loan rate hikes have already translated into an approximate increase of Dh185-200 in monthly payments for a 20-year, Dh750,000 home loan. This also means a higher interest payment of approximately Dh45,000-50,000 during the loan term.

Clearly, you need an action plan to not only combat but also thrive in these times. Here are seven ways to do that.

1. Increase financial protection

You always need adequate financial protection from an emergency fund and insurance covers. Periods of rising and high inflation makes it even more important since emergency expenses make greater demands on your money. The cost of being ill-prepared is high as you might need to make premature exits from long term investments for major needs like buying a house, children’s higher education and retirement. There are two things you will need to do now.

Enhance your emergency fund First, review the amount in your emergency fund earmarked for your emergency needs. It should be at least three months of home expenses with a higher provision required for specific family needs. If you don’t have such a fund, this is just the right time to get started and diligently build it over time. You can park the money in a mix of bank savings accounts, fixed deposits, and very short term debt funds.

Review insurance coverage Second, review your insurance coverage, especially life and health insurance. Since healthcare expenses rise faster than general inflation, if the need be, increase your health insurance cover with an additional plan or a top-up. Similarly, after reviewing life insurance coverage, consider increasing your life insurance coverage by a term insurance plan that provides high coverage at affordable premiums. You could also explore term plans where coverage increases over time. This review process becomes especially crucial for those with large outstanding loans and young families.

2. Reduce debt obligations

High and rising inflation reduces cash at your disposal, limiting your financial headroom. One way of fixing this problem and protecting your money is to find ways to reduce your loan repayment obligations.

Reduce loan obligations Home loan repayments typically constitute one of the largest expenses in the home budget of any family. Depending on the terms of the home loan and funds at your disposal, you could partly or fully prepay any outstanding home loan. This would reduce or eliminate a large financial obligation.

You can get a similar result by refinancing the home loan i.e., transferring the loan to a home loan provider offering significantly lower interest rate. Refinancing needs to result in substantial savings despite any refinance costs like prepayment penalty. Similarly, you could totally retire expensive loans like credit card debt and unsecured loans.

As for new loans, avoid high cost loans like credit card debt. Take new big-ticket loans like home loans well within your repayment capacity, making adequate provisions for future rate hikes. Further, consider delaying or staggering big-ticket purchases that require financing. The savings from rejigging your loan obligations should not only help generate regular savings but also help you redirect these monthly payment amounts to regular investments. Remember, you now need to invest more to accumulate more for future needs.

3. Adapt your fixed income investments

During periods of high and rising inflation, even though interest rates rise, fixed income investments are the hardest hit. Their returns typically struggle to keep up with the rising interest rates. That is why reinvestments of maturity proceeds is also a challenge. In this backdrop, follow a two-pronged strategy to secure your money in fixed income investments.

Provide for imminent needs First, the amount of money needed for emergencies and imminent needs like a big-ticket purchase, can be parked in interest bearing investments like fixed deposits. Here, easy accessibility is more important than returns.

Go short-term Second, invest in short-term debt investments, be it a short term deposit, bond, and short term debt mutual funds. With rising interest rates, long term debt investments such as longer term fixed deposits can hurt you as you get locked into an interest rate in a rising interest rate environment. A short term investment helps you latch on to the higher rate investment after the end of the term.  Second, you could actively consider short term market-linked debt investments such as shorter term bonds or short term debt funds. Such investments not only have the potential to provide you with capital gains but also provide regular income in the form of coupon payments. Of course, longer term debt investments risk hurting you as they will experience volatility in their values.

Consider inflation-indexed bonds and funds Consider inflation-indexed bonds where the face or par value of the bond adjusts with the inflation rate even as they typically make coupon or interest payments.

4. Diversify your investments across asset classes

During the dream run in stock markets that started in 2020 and continued till the end of 2021, it was tempting to put all your investment eggs in the stocks basket. However, with rising inflation and pressures on profitability of listed companies, it now makes sense to spread your investment eggs across different asset baskets such as debt and gold to protect your money. Experts call it “asset allocation.” For a layperson, this means ensuring that developments or risks associated in any one asset or investment class does not adversely affect the overall growth of investments. Remember, a child’s higher education and your retirement can not wait. Thus, you cannot afford to let your investments take a year off for sabbatical.

Consider multi asset funds Tracking equity, debt, commodity markets can be a challenge for most individuals since they are unlikely to have the time or expertise. That is why considering different multi asset funds offered by mutual funds can be an attractive proposition. Their potential of delivering some stability in returns brings a level of much-needed calmness in turbulent conditions.

5. Explore different investment opportunities

While it is true that high and rising inflation, rising interest rates and disruption in global supplies of energy, food and other critical products have impacted all countries. However, the impact has, and will be, uneven. Some countries will be better placed to withstand the impact of the currently unfavourable global economic conditions. For instance, a commodity rich country might just be in a better position to ride out the high inflation scenario. This is where you have an investment theme to use and an opportunity to protect your money.

Enter international funds As an individual, you are unlikely to have the expertise of making efficient and successful international investments. This is where international equity funds that invest in equities and indices across the globe can come to your help. This geographical diversification helps you manage the risks from investing in one country’s stock markets. Given the current global economic situation, international funds with well-diversified investments across countries and regions are best placed to deliver maximum benefits.

6. Add gold’s lustre to your portfolio

As part of your efforts towards diversification of investments to minimise risks, actively consider gold investments. As many of us know, gold investments are typically in demand when investors are unsure about the course of the financial assets be it debt or equity. This typically happens during times of financial crisis or extreme uncertainty, political strife, and periods of high inflation. Clearly, the current scenario seems to be ticking all the boxes in favour of gold investments.

Restrict investment amount Historically, across countries, returns from gold have broadly kept up with inflation, even as its returns have remained stagnant or low for extended periods interspersed by some periods of remarkably high growth. That is why experts suggest a small presence of gold, amounting to 5-10 per cent of overall investments, to lend stability to your portfolio’s overall returns.

Instead of buying physical gold for investments, consider the convenience of financial investments in gold. This means gold exchange traded funds (ETFs), offered by mutual funds. They are listed on exchanges like shares and can be bought and sold there. Then, there are gold mutual funds that invest in gold besides gold bonds that might combine coupon payments with price appreciation.

7. Consider total returns and cash flows

During times of high and rising inflation, a key move to protect your money actually involves making some investments growing faster than inflation. Historical data across countries have often established that stock market investments provide the best long term returns that leave inflation far behind. The question then arises is that during a time of high and rising inflation that will often make stock markets edgy, with some bouts of market corrections, how do you get this growth?

The key is to seek companies with the wherewithal to manage rising expenses well, often with enhanced productivity. They should also not be saddled with large, fixed costs like those for debt repayment. In short, companies with free cash flows.

The other thing to look for are earnings prospects in the near future and not explosive growth in the future, something that enamoured investors till very recently. Such companies will not only deliver better returns through price appreciation but also provide dividends. Thus, the focus needs to be on total returns much like that for market-linked debt investments.

Ask any financial expert and he or she will identify inflation as the number one enemy to any family’s future financial security. Yet, with the seven ways we have identified, you would not only ride out but thrive in these times of high inflation.