How to make money with inflation of 11.1 pc

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2) Real estate investment funds

Cautious investors may prefer more “defensive” investments, such as mutual funds that own real estate. These funds are particularly attractive when their rental income is linked to inflation.

Analysts at the broker Numis said they were in favour Supermarket Income Reit and LXi Reit for this reason. Broker’s Colette Ord said: “It should help the funds deliver healthy rental growth in the current inflationary environment. Supermarket income Reit has tied 85 percent of its current rental roll to inflation.

3) Infrastructure funds

Rob Burgeman of the asset manager Brewin Dolphin said investors should also consider “real assets” in the infrastructure sector, as the essential nature of assets such as bridges and roads meant they could hold their value.

“The 3i Infrastructure fund consists of a wide range of assets in Europe and Asia,” he said.

4) Indexed Bonds

Investors can also turn to inflation linked bonds issued by the government, also known as ‘gilts’. They sound simple at first: the income they pay rises with inflation, as does their maturity value. But the way they behave is more complicated. The Telegraph’s Questor stock selection column asked Hamish Baillie of Ruffer, a fund manager who manages several portfolios designed to beat inflation, to explain:

“What drives the price of these ‘linkers’ is the ‘real’ interest rate,” he said. “Real interest rates are interest rates relative to inflation – for example, if bank interest is 3% but inflation is 1%, then real interest is 2%. Now, of course, we are in the opposite position: inflation is higher than interest rates.”

But it’s not just negative real rates that create a favorable environment for index-linked Gilts. Instead, Baillie said, “you want real interest rates to fall.”

This is another way of saying you want inflation to rise faster than interest rates. This is exactly what we can expect if inflation takes off: the Bank of England will be hesitant to do what it normally does to fight inflation – raise interest rates – as consumers, businesses and government itself bear the brunt of their can carry loans only if interest rates remain low.

Which indexed gilts to buy? Here’s more from Questor:

“Short-maturity” gilts approaching maturity offer little return, because inflation can’t affect their value much in a year or two anyway. Longer-dated gilts offer the greatest sensitivity to inflation, but the longest-dated gilts are more volatile, so we choose the middle ground: a linker that matures in 2036.

Linkers are available from brokers such as Hargreaves Lansdown or directly from the Government’s Debt Management Office. Even outside of an Isa or Sipp, capital gains are tax free, although income is taxable.

Investors can also access index-linked bonds through funds. Mr. Burgeman highlighted the Capital Gearing Trust. “It is managed by City veteran Peter Spiller and offers exposure to a range of assets, including bonds, infrastructure and real estate, private equity and debt,” he said.

5) Gold

The yellow metal is traditionally seen as a safe haven during periods of high inflation or market volatility. At the start of the year, it experienced a strong dollar rally, rising as much as 13 percent to $2,039, but the recent decline has erased its gains and the price now stands at $1,769. A weak pound has led to stronger returns in gold, which is up 33 per cent to £1,507 in pound sterling terms.

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Popular wealth preservation mutual funds such as Ruffer Investment Company have replenished their positions in gold.