Inflation Indexed Bonds (IIBs)

This is the new animal in our town, every body is talking about it.

I will offer 3 very nice blog/web pages in this subject for your consumption. Between these three pages you will get everything you want. I would save my time not writing again the same thing. Please read it in the same order.

1) Written by Vidya Bala for Funds India.

Are inflation-indexed bonds attractive?

2) Written by Dhirendra Kumar

Inflation Indexed Bonds are a Disappointment

3) FAQ from RBI website

FAQ on Inflation Indexed Bond at RBI website


Deepak Shenoy says : In April 2013, the WPI shows just 4.89% inflation, while the CPI shows 9.39%. The gap is so wide that there is no chance any retail investor will want to buy indexed bonds based on the WPI. CPI also contains elements the WPI does not, such as housing costs, services and others. In addition, the CPI revisions have been minor, and therefore is a more reliable number.

IIBs will be out by first week of June and will be bought by institutions. I am not sure if the mutual fund schemes will be created to handle this exclusively. When we buy the same bonds through the bond funds the nature changes very much.

For example, TIP from US treasury has principal protection. This means your yield may vary depending on your holding period, but your original investment can’t go negative.

But VTPSX ( lost money in 2008 and made ridiculously high return in 2009. Check this link.

It all depends on how mutual funds are going to package it in India. US has two flavors of inflation protected bonds. TIPS and I-Bonds. I like and hold I-bonds instead of TIP or funds holding TIP. These funds are too volatile and difficult for any planner to make any predictions. Can’t play on the yield curve.

I am eagerly waiting to get more information of IIBs. If they are attractive, I will definitely recommend in this blog. Please stay tuned.

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