As you may be aware, rising prices slowly erodes your wealth. So, if your investments fail to keep pace with inflation; you don’t earn any real returns. Thus, when inflationary pressures are mounting, it exposes your investment portfolio to a threat of not earning enough to meet rising cost of living. And in such times it is imperative to be on a pursuit of having investment avenues which can beat the inflation bug.

Last year in June 2013, the Reserve Bank of India (RBI) introduced Inflation Indexed Bonds (IIBs) to help investor clock an effective real rate of return and reduce the dependence on gold as a hedge against inflation. The time was opportune as there were concerns on inflation (both on WPI and CPI level) and burgeoning gold imports. You see, initially the rate of return on IIBs was linked to the movement of WPI inflation. But later, on prudent recognition that WPI linked IIBs served little purpose, in the second phase, CPI-linked IIBs were launched at the time when retail inflation was hovering at around 11%.
 

Mellowed down inflation

(Source: MOSPI, PersonalFN Research)  

However now with the measures taken by the Government and underlying macroeconomic variables, inflation has mellowed down, and so have the gold imports recently fallen sharply (In the first fortnight of December 2014 gold imports have fallen to about 25 tonnes from 150 tonnes in the month before).

So in such a scenario, have Inflation Indexed Bonds lost appeal?
Well, there are factors such as the following which seem to have taken the sheen off from IIBs…
 

• The retail inflation has fallen sharply over last one year; from the high of 11% to under 5% recently; which is an all-time low since the new data series was launched in 2011.
   
• It is also believed that, worst on the inflation front might be over and there are signs of moderation. The number of steps taken by the RBI and the Government may keep inflation under check. Thus with a rate of return linked near the prevailing CPI, it is not encouraging enough for one to invest in IIBs.
   

A few more reasons why IIBs have failed to impress are…
 

• There isn’t any tax incentive for investors to deploy their hard earned money in these bonds vis-à-vis investing in Public Provident Fund (PPF) which clocks a return on 8.7% p.a. with an E-E-E (Exempt-Exempt-Exempt) status.
   
• Also, in the current form IIBs have several restrictions such as: cannot be actively traded, 3-year lock-in period for senior citizens, a minimum investment limit and so on.
   

You see, such bonds were launched to provide hedge against inflation. So, if inflation remains under check going forward, as widely expected, or even mellows down further, IIBs may find few takers. PersonalFN is of the view that, lacklustre performance of IIBs suggests that, you shouldn’t blindly invest even in a product which is apparently safe and dependable. Unless the investment serves your purpose, it would not be the right fit in your investment portfolio. PersonalFN believes investors would be better-off if they adopt a more cautious approach to investing. Personalised asset allocation created keeping in mind your long term financial goals would be the first right step in the right direction.

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