Skip to main content

All about Inflation Indexed Bonds ( IIBs )

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

 

Lately, depositors have seen negative returns on fixed income investments, as inflation has been high and interest rates low — while inflation has been hovering at about 10 per cent, interest rates on fixed deposits stand at an average of eight per cent, leaving investors saddled with a loss of two per cent on their investments. However, that might not be the case anymore.

Soon, the Reserve Bank of India will launch inflation- indexed bonds, a boon during times of high inflation.

These bonds would be linked to the wholesale price index ( WPI).

How it works

Inflation- indexed bonds would have a fixed real coupon rate and a nominal principal value, adjusted against inflation. Periodic coupon payments are paid on an adjusted principal. Therefore, these bonds provide inflation protection to both the principal, as well as the coupon payment.

Since the coupon would be paid on the adjusted principal, the final yield, or the cash the investor receives in hand, would fluctuate, depending on the WPI movement. On maturity, the investor would receive the adjusted principal or the face value, whichever is higher.

Assuming the principal amount is ₹ 1,000 and the coupon is fixed at eight per cent, if inflation is stable, the return would be ₹ 80. But if inflation rises five per cent, the returns would be calculated on ₹ 1,050. At an eight per cent coupon rate, it works out to ₹ 84.8. In the first tranche ( June 4), ₹ 1,000- 2,000 crore of inflation indexed bonds would be issued, of which 20 per cent would be reserved for retail investors. Based on initial issuances, the second series of these bonds for retail investors is proposed to be issued in the second half of this financial year, RBI has said.

The central bank is yet to issue details on how these bonds would operate. In a recent conference call, it had said retail investors could participate in these bonds through demat accounts, and the minimum amount for retail participation would be fixed at ₹ 10,000. There will be no special tax treatment for these bonds.

Who should invest

An advantage these bonds have is since the principal would be readjusted for inflation, the real returns on the portfolio would remain.

Retail investors should consider investing in these bonds, as these are inflation- adjusted and, therefore, commit a real rate of interest to the investor, against regular bank fixed deposits (FDs), which pay a fixed coupon on the principal. Therefore, if you had invested ₹ 1 lakh in a five- year bank FD with eight per cent interest and annual payments, your payments would be fixed at ₹ 8,000, though the real value of this would deplete, due to a rise in inflation. In fact, there is also a possibility of your money growing.

Given the safety of these bonds, it might not be a bad idea to have some amount of your fixed- income portfolio in these. But as interest rates are headed downwards, it might be better to lock into bank FDs, which are close to their peak rates. Or invest in debt mutual funds, which could give capital gains when interest rates fall. Since these bonds would be issued for 10 years, these are best suited for investors with a long- time investment horizon. Historically, in developed markets, such bonds were beneficial for investors with a long- time horizon.

These bonds would also work well for investors looking at real regular income, as interest payments are made semi- annually.

Things to watch out for

The real benefit these bonds have over FDs The fact that they are linked to the WPI means returns would not be flat, which is good. But we need to watch what the actual coupon rate would be. For instance, if the returns, that is, WPI plus coupon rate, are the same as those on other fixed- income instruments, these are not very attractive. If I have to invest in these bonds, they must offer higher returns than FDs. In their current form, another disadvantage inflation- indexed bonds have is the interest is linked to the WPI. Compared to WPI, the consumer price index ( CPI) is a better representative of the consumer's purchase power. From a retail investor's perspective, linking the interest with CPI is more beneficial. In April, WPI based inflation stood at 4.9 per cent, while CPI- based inflation stood at 9.4 per cent. Since the differential between these indices is substantial, if the interest is linked to CPI, these bonds could act as an alternative investment to gold, by offering a hedge against inflation, Liquidity is another important factor to consider. Investors should wait and see what liquidity options these bonds offer, once listed.

Retail investors can include inflation indexed bonds in their debt portfolios, as these provide a hedge against inflation. Though the coupon rate is fixed, it would be paid on the adjusted principal, which would vary, depending on inflation. This means the final yield would vary, according to inflation. Nevertheless, investors should invest in these bonds for the long term.

With RBI set to launch IIBs soon, a look at what these are and how they could benefit you

|Assuming initial investment of ~ 1 lakh; IIB principal tied to inflation |In case of IIB coupon rate of 3%, WPI is average of last seven years |Bank FD is assumed for a tenure of seven years; IIB returns are for five years

IIB at 3 % coupon Bank FD @ 8% Initial investment (~) 1,00,000 1,00,000 Increase in WPI (%) 6.59 NA Coupon rate/ interest on bank FD (%) 3 8 Interest received (~) 26,661.9 74,102 Adjusted principal on withdrawal (~) 1,56,130 NA Total amount received on withdrawal (~) 1,82,791.9 1,74,102

Yield (%) 7.83 8.24

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

Mutual Fund Review: Taurus Tax Shield

    Taurus Tax Shield has seen a turnaround in performance since 2007, but still remains a volatile offering… The fund has seen a turnaround in its performance since 2007 and has delivered impressively during market rallies since then. The portfolio is also more diversified. It contained its downfall to an average level in 2008 but is still one of the most volatile offerings in this category. Bold investors can look at this fund.   Strategy The fund manager invests across the market capitalisation and sectors. The selection of stocks is made on the basis of long-term business prospects and value creation. Fund Insight Launched in March 1996, the fund was a laggard with just two annual outperformances. Concentrated stock bets and high exposure to mid and small caps led to it being hit harder during market downturns. The number of stocks in the portfolio never exceeded 20 and it was not rare to see the top 5 holdings account for around 60 per cent of the portfolio. After b...
Read more

Use Mutual Fund SWPs for getting fixed payments

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   Investors time withdrawals optimally to save on tax The systematic withdrawal plan, or SWP, could be called the lesser known cousin of the much talked about and publicised systematic investment plan (SIP). There's yet another cousin — the Systematic Transfer Plan ( STP ). In SIP, you invest a fixed sum of money at regular intervals (monthly/ quarterly) to buy some units of a mutual fund scheme. In SWP, as the name suggests, you do the opposite: You redeem some mutual fund units from your portfolio to get a fixed sum of money at regular intervals (monthly/quarterly/half year/yearly). In SIP, you get a higher numbers of units when the markets are down, and lesser in a buoyant market. In SWP, going by the product logic, you redeem higher number of units when the markets are do...
Read more

AXIS Long Term Equity Fund - The Best Tax Saver Fund for 2016

  AXIS Long Term Equity Fund - Invest Online   History:   The open ended mutual fund was launched on December 21 in the year 2009. It is benchmarked against BSE 200 and managed by the fund manager JINESH GOPANI. Initially the scheme was called as Axis tax saver fund but later it was renamed as Axis long term equity fund with effect from September 2, 2011. Nature of investment: As far as asset allocation is concerned, 97.52% of the stocks are equity and 0.02% is debt based. The primary focus of the fund is to invest in diversified equity stocks that have higher growth potential. Total asset size of the fund is in the tune of 4,996 CRORE as of June 30, 2015. Performance: The performance of the fund for one year, 3 years and 5 years are 23.6%, 29.9% and 19.1 respectively which are far greater than 6.4%, 14% and 5.6% benchmark figures. It has also preformed fairly well against SBI magnum Tax Gain (G) and HDFC tax saver (G). The growth comparison is enumerated below;                        ...
Read more

Health insurance guide - Part I

Insurance, by definition, is morbid. What if I die suddenly? What if my home caught fire? What if I had to undergo expensive medical treatment? What if something that I thought happened only to others befell me? Insurers, who work with large samples, calculate the probability of such an event and, hence, the possibility of them having to pay out a sum of money to mitigate, to the extent possible, the effects of that disaster. However, the possibility of you undergoing some kind of expensive medical treatment during your lifetime is far more likely than you dying suddenly or your house burning down. Given that costs at private healthcare facilities, where you are most likely to land up, is high, and, doubling every four years 10 months or so, the rest of your money life could easily go out of whack if you had to incur such expenses. Just 12 per cent of India's population is covered with some sort of health insurance. Pared to the bone, for a comparatively small price, health insu...
Read more

IDFC Classic Equity Fund

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   IDFC Classic Equity Fund IDFC Classic Equity is a large-cap equity fund which currently has assets under management worth Rs. 158.52 crore. It was launched in August 2005. The fund is benchmarked against the BSE-200 Index. Performance YTD 1-Year 3-Year 5-Year Since Inception IDFC Classic Equity 0.93 26.61 6.30 1.01 11.65 BSE 200 1.52 17.31 6.00 1.99 12.98 All figures in % as on January 31, 2013; Returns above one-year in CAGR terms ...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now