What it is
Inflation risk is the possibility that investments, assets, and savings will lose value when the prices of goods and services increase.
This is because inflation can erode a currency’s purchasing power, or how much goods and services your money can get you.
What it means for you
Rising inflation can lessen the “real” value of your investments. Even if your investments are growing at the same rate as before, your money may buy you fewer goods and services than it used to because of higher costs.
Fixed-income assets like bonds and time deposits tend to be more vulnerable to inflation risk. Since these pay a fixed rate, there’s no possibility of earning more from such investments to outpace inflation.
To manage this risk, investors may consider diversifying into investments with the potential to grow money faster than the inflation rate.
You should keep in mind, however, that investments with high growth potential also tend to be more volatile.
Being aware of the risks of investing can help you plan your portfolio properly so you might strike a balance between growing money and keeping it safe.
