Now a bond fund indexed to inflation, India’s first
Jan 08 2014 , Mumbai
Given the persistently high inflation, these bonds offer investors inflation protection on both principal as well as interest payments. The Government of India has been issuing IIBs on a monthly basis since June 2013; the outstanding issuance as of date stands at Rs 6,500 crore.
The IIBs issued by the Government of India have their coupon and principal payments linked to inflation as measured by the wholesale price index. They have a tenure of 10 years.
The DWS inflation-indexed bond fund is an open-ended debt fund and it will invest 70 per cent of the total assets in IIBs, predominantly those issued by the government, and the rest 30 per cent in other debt instruments to meet liquidity requirements. The new fund offer period is from January 16 to 27.
Globally, investors use inflation-indexed bonds to protect their investment against inflation. In India, these bonds are now available at an attractive yield of 3.6 per cent above WPI.
Normal fixed rate bonds provide a known/defined nominal return at maturity with the investors bearing inflation risk.
Suresh Soni, MD & CEO of Deutsche Asset Management India, said, “The DWS inflation-indexed bond fund will offer investors an attractive opportunity to earn inflation-adjusted returns. While, globally investors have seen benefits of inflation-linked instruments, we believe these instruments are especially relevant to India, given the persistently high inflation level.”
As per the last RBI auction in December 2013, the WPI (wholesale price index)-linked IIBs are now giving 3.6 per cent yields above WPI, whereas the WPI itself stands at 7.5 per cent (as of November 30, 2013) making IIBs very attractive for investors.
The average inflation has been high at 7.86 per cent over the past three years. The average WPI inflation in India was 6.7 per cent over the past 10 years, while it was 7.74 per cent between 1970 and 2013.
The benchmark for the Deutsche fund is I-Sec Composite Index. The fund will have dividend (regular, monthly and quarterly payout and reinvestment), growth and bonus options. The exit load for investors who redeem within a year from the date of allotment will be 1.5 per cent.
In the US, treasury inflation-protected securities issued as the US government bonds similar to IIBs have issuance of $985 billion, almost 8 per cent of the total marketable outstanding debt securities of the US government.