Can you afford to ignore RBI's retail inflation indexed bonds

It is an inflation-indexed bond which come with a face value of Rs 5,000. This is also the minimum amount you can invest. The maximum amount is Rs 5 lakh.

Bindisha Sarang December 20, 2013 16:11:10 IST
Can you afford to ignore RBI's retail inflation indexed bonds

The Reserve Bank of India (RBI) announced Inflation Indexed National Savings Securities-Cumulative (IINSS-C), or inflation indexed bonds, from 23 December to 31 December for retail investors.

The objective is to provide a hedge against inflation, especially to middle class and poor savers. Kudos to the RBI for launching such an investment instrument, but the real question is: would this instrument actually work for you? Read more to know.

Can you afford to ignore RBIs retail inflation indexed bonds

Reuters

What is it:

It is an inflation-indexed bond which come with a face value of Rs 5,000. This is also the minimum amount you can invest. The maximum amount is Rs 5 lakh.

What is the interest

As per the apex bank's guidelines, "The Bonds will bear interest at the rate of 1.5% (fixed rate) per annum + inflation rate calculated with respect to final combined Consumer Price Index (CPI)[Base; 2010 = 100]." This means if CPI is at 11 percent, the bond will give you 12.5 percent returns (11%+1.5%). Also keep in mind that 1.5 percent is guaranteed even if there is deflation. Keep in mind that the interest for this instrument will be compounded half yearly and the bond comes with a tenure of 10 years.

Finer details:

You can also pledge these bonds to get a loan. Interest earned on the bonds is taxable as per your respective tax bracket. You can buy this bond in your individual capacity or on joint basis or even on behalf of a minor. Though NRIs are not allowed to invest in these bonds, they can be nominees. Remember, these are non-tradable in the secondary market. Also senior citizens are allowed to pre-maturely redeem the bond after holding the bond for one year, for non-senior citizen investors, the holding period is three years.

What you should do:

If you are a long-term investor, this instrument may make sense for you, and could be accommodated as a small part of your overall portfolio. However, for those looking for liquid instruments these bonds are not the right option. They can try others like FD (which offer tax benefit under 80 C), MF maturity plans, tax-free bonds and PPF. If you plan to redeem it before time, you might want to reconsider investing in these bonds. This is because in such case you would have to bear a charge at the rate of 50% of the last coupon payable. Keep in mind that PPF and tax-free bonds currently offer slightly higher rates than 8 percent as of now. Assuming the current coupon rate of the inflation index bond is 11.5 percent, the post-tax returns for investors in highest tax bracket, would be 8 percent. Buying this bond or not is your call, do look at your overall risk profile, investment objective and how long you can hold the investment before investing.

Updated Date:

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