Smart things to know about inflation-indexed bonds

Smart things to know about inflation-indexed bonds:

1. In Budget 2013, the finance minister has announced a proposal to introduce inflation-indexed bonds (IIB) or inflation-indexed national security certificates.

2. The fixed income instruments pay a stipulated interest through the term of the bond. The real return for the investor will be low in keeping with the inflation.

3. The impact of inflation is higher for those who invest in long-term fixed income bonds. The IIBs will be of interest to the investors seeking to protect their long-term debt portfolio from the effects of inflation.

4. The IIBs negate inflation as the interest received on bonds and maturity value are linked to the prevailing inflation. The principal amount is adjusted by an inflation indexation factor for each interest payment period.

5. The choice of the inflation measure used as a benchmark to adjust for inflation will determine the efficacy of the bonds in protecting the investor against the effect of inflation.

6. The taxability of interest income, maturity value and the relative attractiveness of the post-tax returns of the bonds compared with other fixed income options must be evaluated before making a decision.

(Courtesy Centre for Investment Education and Learning (CIEL). Contributions by Sunita Abraham, Girija Gadre and Arti Bhargava)