Four ways to protect your money from inflation

Put simply, inflation is when prices rise and things cost more than they used to. If your savings don’t keep pace with inflation (for example, if they are in an account with an interest rate return that is lower than the rate of inflation), your money will buy less over time, effectively decreasing in value.

Here are four different ways to combat inflation and seven funds that could do the job for you.

1) Pick the right asset class

Real assets, like gold and property, as well as their related shares, generally do well in periods of higher inflation. Gold, especially, is commonly used but hard for small investors to hold in any form other than jewellery. So a fund like Merian Gold & Silver is worthy of consideration.

When it comes to property it’s an imperfect, but partial, hedge: many rents in Europe are index-linked and in the UK rent reviews are upward only while any wage inflation could make increases possible. I like BMO European real Estate Securities.

2) Be specific

There are some companies that do better than others in inflationary environments. Cash generation provides a buffer for a company, enabling it to self-fund its operations through tougher times. And pricing power is particularly important, as the company will be better able to offset rising costs by passing them on to customers.

Evenlode Income invests in some such companies. Infrastructure is also a good bet, as many of these assets have prices linked to inflation. You could consider First State Global Listed Infrastructure.

3) Avoid bonds

Inflation is also usually the enemy of bonds. Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation can be a problem, as it erodes the real return you receive.

To mitigate this risk you could invest in a strategic bond fund like Invesco Monthly Income Plus, that has the flexibility to invest anywhere in the fixed income market and aims to provide a high income.

4) Let the professionals take the lead

If you’d prefer to leave the decisions up to a professional investor, you could consider a multi-asset fund and let the fund manager adjust the asset allocation to deal with issues such as inflation when they occur. Funds such as Jupiter Merlin Balanced and Premier Multi-Asset Growth & Income are two such examples.

This article was first written in April 2016 and update in May 2020

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.