20 May, 2013

Inflation Indexed Bonds are not so hot after all

The inflation indexed bonds are linked to WPI, which is significantly lower than CPI. The retail investor is more interested in CPI and hence there is a fundamental disconnect. The eventual returns are not expected to be significantly better than existing options due to this - in fact it may be worse off. Hence, the inflation adjusted return is just on paper as this is not probably going to beat CPI even in future.

Also retail investors are put off when the interest rate is not a fixed amount they can expect ( the same problem with debt mutual funds due to which their participation here is low ).

Taxability aspect is not clear. If it is capital gains tax treatment, there is some benefit to be derived there. Should it be like interest income and taxed, it’s attraction diminishes further.

At best, it is meant for conservative investors.  Those who want to earn a bit more would not come here. There are many better options out there.

Published in Moneycontrol.com ; Author - Suresh Sadagopan

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