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Inflation indexed bond funds

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Inflation indexed bond funds

Asset management companies (AMCs) and insurance entities are awaiting fresh issuances of inflation- indexed bonds (IIBs) by the central bank, to launch new offers in the segment.

Last week, SBI Mutual Fund launched a new fund offering for its IIBs. More players said they could launch similar products if the Reserve Bank of India (RBI) decides to conduct auctions for inflation linked bonds.

So far this financial year, such bonds haven't been auctioned by the central bank, forcing AMCs and insurers to hold back their plans. We don't want to launch a fund where the underlying market is extremely illiquid. We had considered this product and also filed the prospectus. But once the issuance stopped, we decided to not go ahead with the product. It is an asset class about which we are positive.

If RBI looks at primary issuances of this product. However, as inflation is on a declining path, experts believe IIB funds at this point might not see high demand.

There will be a small demand for these products. This is because investors will look at these products as a hedge against inflation. These products are in demand when inflation rises, as the return at that time turns out to be attractive.

In the current financial year, say experts, RBI had not auctioned these bonds as the response last year was not so positive.

Wholesale Price Index (WPI) - based inflation dropped to 2.38 per cent in September, the lowest since October 2009 (1.78 per cent). Currently, the secondary market for IIBs are illiquid and primary issuances are not coming.

SBI MF, which is relying on the secondary market for buy these bonds, expects its latest offering will attract institutional investors. These papers are available in the secondary market. Going forward, there would be a demand from such kind of products from at least the institutions. That is why we have come out with this fund offering. We are the first ones to launch this product.

Their offering is aimed at investors with a low to medium risk profile. The fund will invest in WPI linked inflation indexed bonds. The first tranche had come in June 2013.

These bonds had a fixed real coupon rate and a nominal principal value that was adjusted against inflation.

Periodic coupon payments are paid on the adjusted principal. These bonds provide inflation protection to both principal and coupon payment. At maturity, the adjusted principal or the face value, whichever is higher, will be paid.

In the current financial year, the Reserve Bank has not auctioned these bonds as the response last year was not positive



 

 

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