Inflation refers to the continuous increase in the prices of goods, services, and the cost of living in a country over some time. It means that the value of money depreciates against the same goods.

Therefore, inflation is categorized as an economic disease, if inflation exceeds reasonable limits, due to its effects that usually affect all aspects of the economy, leading to a decrease in purchasing power, with economic uncertainty, prompting countries to increase interest rates in order to control the economy.

Inflation is opposed to inflation: Economic deflation, which is the decrease in the value of goods against the increase in the value of money, is also an economic disease that is of concern to economists and countries because of its effects, which are usually represented by widespread unemployment and slow growth.

How does inflation affect traditional investments?

In general, economic inflation can have different effects from one sector to another. While some sectors of the economy are declining, others are growing, for example:

Stocks

The prices of companies' shares on the stock exchange are linked to their performance during these periods, but the impact of inflation on production is clear, especially as citizens' purchasing power decreases, which leads to a decrease in the performance of these companies and a decline in their production and shares. Central banks often raise interest rates during periods of inflation, which increases the cost of borrowing and thus reduces the growth of these companies.

Bonds

Bonds are debt instruments issued by companies or governments. They are also affected by inflation in a secondary effect, based on an increase in the interest rate, which means higher yields on new bonds and lower yields on older, lower-yielding bonds.

Real estate

When inflation rises, prices take their right to grow slowly, which burdens the wheel of real estate production, due to the high cost of raw materials and labor wages, which clearly increases the value of real estate, whether buying, selling, or renting.

The role of investment funds in hedging against inflation

Mutual funds can be ideal tools to hedge against inflation and its effects, thanks to their general and specific advantages, such as

Funds specializing in commodities

In this type of investment fund, commodity prices naturally rise with inflation, which protects the capital and contributes to its growth as the price of commodity assets (such as gold, oil, and agricultural crops) rises.

If the fund's management chooses its assets well and holds or sells them at the right time, these investments can achieve good growth to offset the negative effects of inflation.

Real estate funds

تReal estate funds will invest in real estate assets, which are considered tangible assets that maintain their value or tend to grow during periods of inflation. In addition, prudent fund management policies will also contribute to the prudent handling of potential economic risks.

Balanced funds

Or what is known as: mixed funds, which are investment funds whose portfolio expands to include various types of investments, such as real estate, bonds, stocks, and commodities. In this type of fund, investments are distributed into more comprehensive categories, which means less risk.

Inflation-linked funds (such as Treasury Inflation-Protected Securities (TIPS))

In this type of fund, the value of bond interest varies with the country's inflation, protecting investors' capital from inflation.

Investment strategies to hedge against inflation

In cases of economic uncertainty and the difficulty of recognizing the future of the market, it is necessary to have clear strategies that the investor works on to preserve his assets and capital, for example:

1. Distributing investment among more stable assets, such as gold and other precious metals and oil, as trading in gold and precious metals can be adaptive to global events and changing news.

While inflation leads to currency devaluation, gold, and precious metals have historically retained their relative value and purchasing power remarkably well. Although not as good as bonds or stocks in providing a good income, gold, and precious metals are ideal assets to invest in periods of inflation.

1. In the case of equity investing, a well-diversified portfolio is critical during more challenging environments, such as times of inflation or recession, so it is important to diversify into several global and local stocks, and mutual funds are an easy way to access a diversified portfolio of stocks that helps protect against inflation.
2. Investing in real estate, whether through direct investment or in real estate funds, as real estate often produces a satisfactory income for its investors in addition to the possibility of increasing the value of assets, as well as increasing the value of rents in conjunction with rising prices during times of inflation.
3. Investing in commodities, especially in raw commodities, which are one of the first elements to feed inflation, given the likelihood of higher prices, and this can be done through direct investment; investing in companies specialized in these commodities, or even funds that focus on commodities.

It is also useful to spread the investment across more than one sector. In inflationary phases, investment decisions should not be made impulsively without considering the consequences, so it is advisable to seek the help of experts and consultants, and closely follow market developments to build a clearer vision and make sounder decisions.

Advantages and disadvantages of using mutual funds to hedge against inflation

Mutual funds have many advantages that make them a suitable option for hedging against inflation, the most important of which are:

1. Funds have professional management that can deal with economic issues with skill, making it easier to invest in them than doing it yourself during turbulent economic conditions.
2. When inflation occurs in a country's economy, it is wise to look for more stable investment sources, and with funds' access to different global markets, investors have the opportunity to invest in safer conditions.
3. Mutual funds also offer the opportunity to diversify invested assets, helping to minimize risk and maximize growth opportunities.

Along with these and other advantages, it is useful to know some of the disadvantages of this investment process under inflationary conditions, for example:

1. Lack of direct control over the investment, as the fund's management is responsible for directing the investments.
2. No guarantee of profit or complete escape from the effects of inflation, depending on the performance of each fund and its strategies.
3. Bearing the fees and costs charged by the fund management for management services and for investing in the fund.

4. Start your profitable investment in mutual funds in Turkey with Oragon Company

In addition to being one of the companies licensed by the Securities Commission of Turkey to license new mutual funds, Oragon offers its clients a range of promising investment funds, especially in the field of real estate investment, with its exceptional experience in this field, through its professional management team consisting of elite economists with a proven track record.

In addition, Oragon welcomes inquiries from all those interested in discovering our business model, or understanding the nuances of our investment funds, and answering all your questions about them.

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