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

Birla SunLife Manufacturing Equity Fund

The Make in India program was launched by Prime Minister Naredra Modi in September 2014 as part of a wider set of nation-building initiatives. It was devised to transform India into a global design and manufacturing hub. The primary motive of the campaign is to encourage multinational as well domestic companies to manufacture their products in India. This would create more job opportunities, bring high-quality standards and attract capital along with technological investment to bring more foreign direct investment (FDI) in the country.   Why India as the next manufacturing destination?   The rising demand in India along with the multinational's desire to diversify their production to include low-cost plants in countries other than China, can help India's manufacturing sector to grow and create millions of jobs. In the words of our Honourable Prime Minister- Mr. Narendra Modi, India offers the 3 'Ds' for business to thrive— democracy,...

Kisan Vikas Patra - KVP

  Kisan Vikas Patra (KVP) First launched in 1988, the Kisan Vikas Patra (KVP) is one of the premier and popular saving scheme offering from the Indian Postal Department. This product has had a very chequered history- initially successful, deemed a product that could be misused and thus terminated in 2011, followed by a triumphant return to prominence and popular consumption in 2014. The salient features of KVP are as follows- The grand USP- Money invested by the applicant doubles in 100 months (8 years, 4 months). KVPs are available in the following denominations- Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum purchase value for the KVP is Rs.1000. There is no maximum limit. KVPs are available at all departmental post offices across India. These certificates can be prematurely encashed after 2 ½ years from the point of issue. KVPs can be transferred from one individual to another and from one post office to another. ----------------------------------------------------- Inve...

Mutual Fund Review: Reliance Regular Savings Equity

    Despite high churn, Reliance Regular Savings Equity has managed to fetch good returns   In its short history, this one has made its mark. Though its annual and trailing returns are amazing, the fund started off on a lousy note (last two quarters of 2005). It managed to impress in 2006 and was turning out to be pretty average in 2007, till Omprakash Kuckian took over in November 2007 and wasted no time in changing the complexion of the portfolio. Exposure to Construction shot up to 28 per cent with almost 21 per cent cornered by Pratibha Industries and Madhucon Projects . Exposure to Engineering was yanked up (18.50%) while Financial Services lost its prime slot (dropped to 6.69%) and Auto was dumped. That quarter (December 2007), he delivered 54.66 per cent (category average: 25.70%).   When the market collapsed in 2008, thankfully the fund did not plummet abysmally. But even its high cash allocations could not cushion the fall which hovered around the category average. ...

Total Returns Index brings out real Equity Funds Performers

From February, equity mutual funds have to change their benchmarks to account for dividend payments. Until now, funds used price-based benchmarks alone. TRI or total return indices assume that dividend payouts are reinvested back into the index. What this does is lift the overall index returns, because dividends get compounded. For example, the Sensex TRI index will consider dividend payouts of its constituent companies while the Nifty50 TRI index will consider dividends of its constituents. Using TRI indices as benchmarks comes on the argument that an equity funds earn dividends on the stocks in its portfolio, which they use to buy more stocks. Therefore, using an index that also considers dividend reinvestment would be a more appropriate benchmark. Shrinking outperformance With a stiffer benchmark, it is obvious that the margin by which an equity fund outperforms the benchmark would shrink. Rolling one-year returns from 2013 onwards, the average margin by which largecap funds out...

How to generate a UAN Online

Best SIP Funds Online   In order to make Employees' Provident Fund (EPF) accounts portable, the Employees' Provident Fund Organisation (EPFO) had launched the facility of Universal Account Number (UAN ) in 2014. Having a UAN is now mandatory if you have an EPF account and are contributing to it. So far, you got this number from your employer and every time you changed jobs, you had to furnish this number to the new employer.  However, in order to make it easier for you to get a UAN , and without your employer's intervention, the EPFO now allows you to go online and generate a UAN on your own. This facility can be used by freshers, or new employees, who are joining the workforce as well as by employees who have older EPF accounts but do not have a UAN as yet. As a new employee, you can simply generate a UAN and provide the number to your employer at the time of joining, when you need to fill up forms for your EPF contribution. As per a circula...
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