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How to use value funds to hedge against inflation?

3 min read
5 Best Investments to Hedge Against Inflation | Bankrate

Inflation is an economic phenomenon that affects people’s lives in so many ways, from the cost of basic goods to the value of their savings and investments. While inflation can negatively impact all forms of investments, some investment strategies are more effective to tackle inflation than others. Value investing is one such strategy that can be leveraged to hedge against inflation. 

Value investing involves identifying companies whose stocks are currently undervalued or trading below their intrinsic value. The objective is to buy these undervalued stocks and wait for the market to recognize their true value. Buying these stocks at a low price point helps investors earn higher returns over time and offset the effects of inflation on their portfolio.  

Keep reading to know how you can use value funds to hedge against inflation. 

1. Invest in dividend-paying value funds

Look for value funds with a history of offering dividends and holding dividend-paying stocks in their portfolio. This added revenue can protect your mutual fund portfolio against market volatility and help you earn more stable returns over time. 

Value funds that hold dividend-paying stocks also benefit you from the compounding effect of reinvesting dividends. This can lead to more long-term gains as the reinvested dividends buy more shares and contribute to growth. 

2. Look for value funds that invest in defensive sectors

Defensive sectors are those that offer essential goods or services which people continue to need even during an economic downturn. These sectors include healthcare, utilities, and consumer staples, such as food, beverages, and household products. 

Due to their defensive nature, companies in these sectors tend to hold up better during periods of uncertainty and market volatility. Thus, investing in value funds that hold such stocks can offer an additional layer of stability to your portfolio during times of inflation.

3. Use value funds in combination with other investment strategies

Consider using value funds with growth funds, bond funds, real estate investment trusts (REITs), or other mutual funds investment schemes. Different asset classes perform differently during economic cycles and help you balance your portfolio while taking advantage of new growth opportunities.

For example, growth funds can perform better during a bull market, while value funds retain their NAV during bear markets. Bond funds can provide income and stability during market volatility. By strategically combining these funds, your portfolio can be protected against inflation while still earning returns. 

4. Have a long-term horizon

To hedge against inflation using value funds, it is important to have a long-term horizon and buy-and-hold strategy. Value funds invest in companies that are undervalued, which means that they may not be priced at their true worth due to temporary factors. Over the long term, when market recognises the true worth of these companies, their stock prices will rise accordingly. You can share in that growth by holding value funds for the long term.  

To wrap up

Value funds can help you hedge against inflation if you approach with a long-term focus and do not adjust your portfolio unnecessarily based on short-term market fluctuation. 

To maximise the benefits of these funds, carefully research to identify stocks that have excellent growth potential but are being undervalued. This means looking at their underlying fundamentals, industry trends, making qualitative and quantitative analysis, and evaluating other macroeconomic indicators.  

Consulting a financial advisor can further help you invest in mutual funds efficiently and create a diversified portfolio to hedge against inflation.

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