Skip to main content

Inflation Indexed Bonds Returns

Inflation Indexed Bonds Invest Online
 

Remember inflation-indexed bonds, which were launched with a lot of fanfare by the RBI two years ago? With inflation ruling high at that point in time, these bonds were deemed must-haves in a retail investor's portfolio. Finally, there was an instrument that could offer inflation-beating returns and carrying minimal risk, unlike equities.

That was then. Now, with inflation moving southward, returns on these bonds have been lower than those offered by bank deposits. If you've invested in these bonds, here is what you need to take note of.

Back to basics

Inflation-indexed bonds were designed to provide a hedge against rising prices or inflation. The first set of bonds provided a fixed return over and above WPI inflation and the second used CPI as the reference rate to calculate returns. Since the latter captured the true inflation at the consumers' end, it found more takers than the former.

Let us consider CPI inflation bonds first. These bonds were named Inflation Indexed National Savings Securities - Cumulative. With a minimum investment of ₹5,000, they were made available only to retail investors. Interest, which was taxable, was calculated as the sum of the Consumer Price Inflation (CPI) rate and a fixed rate of 1.5 per cent annually. The CPI rate was considered with a three-month lag — for instance, for December 2015, combined CPI for September 2015 will be used as the reference rate. The interest is not paid out, but compounded half yearly. On maturity, which is 10 years from investment, the investor gets back the principal along with the accumulated interest.

Hence, if the CPI inflation is 9 per cent for six months, then add to this 0.75 per cent (half of 1.5 per cent) and the interest paid will be 9.75 per cent. So, if you invested ₹5,000 in December 2013 (when the bonds were launched), then by June 2014, your investment will be worth about ₹5,487.

Given that long-term deposits then offered a little over 9 per cent, these bonds seemed to offer a good deal for investors.

Low returns

But with inflation falling over the last two years, returns which were earlier calculated based on expectations of a rise in inflation, have gone awry. In fact, the return on these bonds is now lower than of bank deposits.

When the bonds were launched, the RBI stated that the combined Consumer Price Index [(CPI) Base: 2010 = 100] would be used to calculate returns. But as a new CPI series has been flagged off this year (base year 2012), we have considered the new CPI for our workings.

If you had invested ₹5,000 at the launch of these bonds, then your investments would be worth about ₹5,700 as of this December. The annual return works out to about 6.5-7 per cent. Despite the recent cut in deposit rates, long-term bank deposits still offer about 8 per cent.

WPI bonds

Let us now consider WPI-linked inflation-indexed bonds. The coupon rate (over and above the WPI inflation) was determined through an auction. Initially, this rate was fixed at 1.44 per cent, which remains constant for the tenure of the bond (10 years). Interest is paid half-yearly. Inflation is accounted for through adjustments to the principal amount. These bonds, unlike the CPI-linked bonds, are traded in the market, albeit with very thin liquidity.

With WPI inflation sliding into negative territory, these bonds have dipped below face value and now trade at ₹83-84 versus the original investment of ₹100.

These bonds, when auctioned, did not see much retail participation. But investors had the option of investing in them indirectly through the mutual fund route.

Mutual fund route

Three fund houses had launched funds that predominantly invested in inflation-indexed bonds (WPI linked) — DWS Inflation Indexed Bond Fund, HDFC Inflation Indexed Bond Fund and SBI Inflation Indexed Bond Fund.

These funds score well on liquidity. Investing directly in inflation bonds (WPI and CPI) would have meant a 10-year lock-in. Also, while your interest on inflation bonds is taxable, in case of funds, you get indexation benefits on capital gains if you hold them for three years. With the returns from these bonds dipping with inflation, the funds have delivered low returns too.

Hence, inflation-indexed bond funds have delivered a muted 3-3.5 per cent return in the last one year.

The way forward

If you invested in inflation-indexed bonds directly or indirectly through the mutual fund route, what should you do now?

Despite the recent poor returns, you should not exit these bonds in a hurry. One, you bought these bonds to protect against inflation and they are doing a good job of that. If inflation does pick up again over the long run, the returns from these bonds would certainly perk up.

Two, early redemption options on the bonds are not attractive. In the case of CPI inflation bonds, as they are not listed, early redemption will cost you half the last payable coupon. In any case, premature redemption is allowed only after one year for investors above 65 years, and after three years for others. In case of the debt mutual funds, yes, early exit is possible, but will be tax inefficient. You need to hold on for three years to benefit from indexation.

-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saving Mutual Funds to invest in India for 2016

Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

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


Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

What is Financial Freedom?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     There were many things common between our Freedom fighters. All had the Single vision (Free India), common goal (independence) and had a disciplined and focused approach. They were ready to do anything and everything and had made so many sacrifices to see India free . But the road to freedom was not easy .They had faced lot many hardships, went to jail so many times and even confronted physical and mental torture from the British. There was one more thing which proved to be an advantage to our fighters that most of them were professional lawyers. The knowledge of legal issues and its impact on our country at large has helped them counter various bills and proposed new laws by the then government. It is due to their continuous effort that we are able to achieve the goal of Independent Indi...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...
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