Inflation-linked investment funds: How to preserve the value of your savings amid rising prices

In recent years, inflation rates have risen in many Arab countries, particularly after global price fluctuations and increases in the cost of basic goods. Many individual investors feel that their savings are losing value, but there is a financial tool that rarely appears in local media and can help mitigate this effect: inflation-linked investment funds.

What is an inflation-linked investment fund?

Inflation-linked investment funds (Inflation‑Linked Funds) are mutual or exchange-traded funds that invest in financial instruments whose value or return is adjusted according to a local or international inflation index. In simple terms, when the price index rises, the return or book value of the assets within the fund increases, and the opposite occurs when inflation eases.

How does the fund work?

There are three main models followed by Arab funds:

• Investing in government or private bonds designed to adjust interest payments according to the inflation index (such as Saudi bonds linked to the CPI).
• Purchasing financial assets such as real estate or infrastructure that are expected to see rising revenues as prices increase.
• Using futures contracts or options to hedge inflation risk on traditional bond portfolios.

In each case, the return or book value for savers is adjusted periodically – usually annually or quarterly – to ensure that the investor’s purchasing power does not erode.

Examples from the Arab market

In the Saudi market, SABIC Financial Company launched the “SABIC Inflation‑Linked Bond Fund”, which includes government bonds adjusted to link their returns to the Consumer Price Index (CPI). The fund pays a fixed base return plus an annual adjustment based on CPI increases.

Meanwhile, in Dubai, Dubai Finance Company launched the “Dubai Inflation‑Protected Fund”, which combines UAE corporate bonds linked to inflation and rental-generating real estate assets with lease contracts subject to annual adjustment according to the price index.

These examples show that the funds are not limited to bonds alone; they can be combined with real assets to create a suitable mix for investors wishing to protect their savings from price pressures.

Advantages and risks of inflation-linked funds

Among the key advantages:

• Protection of purchasing power: Return adjustments limit value erosion.
• Investment portfolio diversification: Combining bonds, real estate, and derivative contracts enhances balance.
• Steady return with flexibility: Unlike traditional bonds that may have fixed returns without adjustment.

However, there are risks that should be considered:

• Adjustment delay: Some funds adjust returns only once a year, which may leave investors exposed to rapid fluctuations.
• Management costs: Derivative instruments require specialised teams, raising fee levels.
• Limited liquidity: Some closed-end funds do not allow withdrawals before bond maturity dates.

Practical steps to invest in an inflation-linked fund

If you decide this type of fund suits your goal, follow these steps to include it in your portfolio:

1. Define your time horizon: Inflation-linked funds are preferred for medium- to long-term investments (at least 3‑5 years).
2. Assess your risk tolerance: Although the idea is protection, these funds may carry market risks and derivative contracts.
3. Search for available funds: Review lists on exchange websites (such as Tadawul or DFM), and use search filters to identify funds described as “Inflation‑Linked” or “Inflation‑Protected”.
4. Compare fees and distribution policy: Check the expense ratio (TER) and dividend distribution history (quarterly or annual).
5. Read the fund prospectus: Focus on asset composition, adjustment mechanism, and performance history compared to the inflation index.
6. Use a reliable broker: Whether a commercial bank or an electronic investment platform, ensure the broker supports the funds you have selected.
7. Start with a small initial investment: It is advisable to begin with an amount not exceeding 10 % of your total portfolio to reduce potential shock.
8. Monitor performance annually: Compare the adjusted return with actual inflation rates to confirm the desired protection is achieved.
9. Rebalance if necessary: If the proportion of non-inflation-linked bonds in your portfolio rises, you may need to reallocate to restore the target ratio.

By following these steps, you can invest part of your savings in a financial instrument that provides a realistic dialogue with inflation and reduces the risk of losing value over time.

Additional tips for Arab traders

• Do not rely on a single fund; diversifying funds across Arab and foreign countries reduces exposure to fluctuations in any one market.
• If you have a savings account that supports variable interest, compare its returns with those of inflation-linked funds to choose the most suitable option.
• Follow central bank decisions on interest rate policies, as these directly affect financing costs for inflation-linked instruments.

In conclusion, inflation-linked funds are not a magic solution, but they represent a financial bridge between the saver’s goal of preserving purchasing power and a market full of price volatility. If used wisely, they add a layer of security that complements your overall financial strategy.