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

Post Office Deposits Interest Rates

Best SIP Funds to Invest Online   SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich For further information on Top SIP Mutual Funds contact  Save Tax Get Rich on 94 8300 8300 OR You can write to us at Invest [at] SaveTaxGetRich [dot] Com

LIC Leave Encashment Plan

LIC Leave Encashment Plan       Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in 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 --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms fro

Power of Compounding in Investments

Power of Compounding in Investments Invest Rs 1,50,000 and Save Tax up to Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds. Save Tax Get Rich Top 10 Tax Saver Mutual Funds for 2017 - 2018 Best 10 ELSS Mutual Funds to Invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Tata India Tax Savings Fund  3. Birla Sun Life Tax Relief 96 4. ICICI Prudential Long Term Equity Fund 5. Invesco India Tax Plan 6. Franklin India TaxShield  7. Reliance Tax Saver (ELSS) Fund 8. BNP Paribas Long Term Equity Fund 9. Axis Tax Saver Fund 10. Sundaram Diversified 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 OR You can write to us at Invest [at] SaveTaxGetRich [dot] Com OR Call us on 94 8300 8300

MF SIP Top Up Online

Mutual Fund SIP Top Up Online As your monthly income grows, so should your savings. With this facility, you can increase your existing monthly SIP contributions. This can be done on a half-yearly and yearly basis. And you can top up with a minimum of Rs.500 per installment or multiples of Rs.500 as per your convenience.

Kotak Banking Exchange Traded Fund (ETF)

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Kotak Banking Exchange Traded Fund (ETF) Kotak Mahindra Mutual Fund has launched Kotak Banking Exchange Traded Fund ( ETF ). The fund aims to provide returns before expenses that closely correspond to the total returns of stocks belonging to the CNX Bank Index , subject to tracking error. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 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 Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund Application Forms --------------------------------------------- Best Performing Mutual Funds Largecap
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