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

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.
Read more

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli
Read more

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis
Read more

Mutual Fund Review: IDFC Premier Equity Fund

  IDFC Premier Equity Fund, which falls under the presumed high risk group of mid- and small-cap schemes, can rely on astute and timely equity picks. These make it less vulnerable to fluctuations compared with others in the category   IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes.    While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows. Thus, while an investor can always take the systematic investment plan ( SIP ) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for l
Read more

IDFC Premier Equity Fund dividend

  IDFC Mutual Fund   has announced dividend under the dividend option of   IDFC Premier Equity Fund Direct-D . The quantum of dividend shall be   R 4.3464 per unit.   The record date has been fixed as May 06, 2015. 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]
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