Understanding the Impact of Inflation on HNI Wealth

Last Updated: 7 Jan 2025

Today, Indians in urban areas are dealing with an inflation rate of 5.62%. This is an alarming situation not just for an average citizen but also for high-net-worth individuals. The impact of this is quite apparent and drastic on the overall value of the HNI’s portfolio.

As a result, it is very important that we understand this impact and take the right measures to avoid adversities. If you are looking to understand the true effect of inflation on your wealth as an NHI, then you will find this blog valuable.

But First, What is Inflation, and How Does It Affect Wealth?

Inflation is a mechanism that reduces the purchasing power of money over a period of time. This means the same amount of money will buy less goods and services with time. It affects everything related to money and, eventually, the general lifestyle of a given individual.

This becomes even worse in the case of HNIs as it diminishes the real return on investments. For instance, imagine you have an investment that yields a return of 8% per year but an inflation rate of 5%. As a result, the real return you will get from the investment will be just 3% instead of 8%.

Ways Inflation Affects HNIs Wealth

While it might not be immediately apparent, there are a couple of different ways inflation can affect an HNI’s wealth. Understanding these effects is important for taking the right approach to mitigate the effects of this phenomenon. Here are some of the most apparent of these ways:

1. Loss of Purchasing Power

The most apparent impact of inflation on HNI wealth is the loss of purchasing power. As inflation increases, the value of our currency naturally reduces over time. Even if the overall valuation of your portfolio remains the same, its real worth will reduce. This is evident since now you can only buy fewer goods and services with the same amount of money.

2. Lower Returns

Another impact of inflation on HNI wealth is a considerable reduction in returns. As inflation increases, central banks are more likely to increase interest rates as a control measure. This will reduce the value of assets in your portfolio, like bonds and equity, leading to lower returns. The real returns you get after adjusting the inflation then reduce considerably.

3. Increasing Costs

Increasing costs is the most direct effect of rising inflation that does not spare anyone. This increases a company’s input costs and an eventual fall in corporate margins. This low profit will then reduce the prices of share and dividend further impacting your portfolio negatively. Interestingly, an increase in inflation will also increase the overall cost of managing the portfolio unless you do it yourself.

Is There Any Way for HNIs to Mitigate the Impact of Inflation?

While inflation is a concern, the good thing is that you can do a couple of different things to reduce its impact on the portfolio. For instance, you can consider investing in banking and infrastructure equity that benefit from long-term economic growth.

Other than that, investing in real assets like gold and real estate is also a great way to combat inflation. You can also consider reducing your cash holdings and investing in inflation-indexed bonds to minimise losses.

Bottom Line

There is no denying that inflation can affect your portfolio’s value in many different ways, and most of them will be negative. This is what makes it so important to understand these effects and take proper steps to combat inflation.

You can do that by investing in real assets, selective equities and inflation-indexed bonds. This will be very helpful in reducing the overall inflation rates and driving sustainable growth in the long run.