SBI MF Inflation Indexed Bond Fund-Who should invest?
SBI MF Inflation Indexed Bond Fund
SBI Mutual fund has launched a new fund named Inflation Indexed Bond Fund on 23rd October, 2014. SBI MF Inflation indexed bond invests in Inflation indexed securities and manages a portfolio of inflation linked bonds. How good is SBI MF Inflation Index Bonds (IIB) Fund? What are the positives and negative points about this SBI Inflation Indexed Bond Mutual fund?
What are Inflation Indexed Bonds?
Last year in Jun-2013, RBI has launched Inflation indexed Bonds, which aims to reduce non financial investments like investments in gold. These indexed bonds are issued to attract household savings so that investors would reduce the investments in gold. Government of India and RBI aimed that these will protect the savings of poor and middle class investors from inflation, incentive the household sector to save in financial instruments, rather than buying gold. Inflation indexed bonds returns = Inflation rate + fixed return
Also Read: What are RBI Inflation Indexed Saving Securitites in India?
About SBI MF Inflation Indexed Bond Fund
SBI Mutual Fund Inflation Indexed Bond fund invests in Inflation indexed securities and manages a portfolio of inflation linked bonds. Inflation indexed bonds provides fixed return over and above the inflation rate. These hedge against inflation price rise. Below are some of the details of this NFO.
- NFO Opens: 23-October-2014
- NFO Closes: 31-October-2014
- This fund is aimed for investors who are in low to medium risk profile.
- This is open ended scheme. You can invest even after 31st October, 2014 once it is re-opened for subscription.
- The investment strategy is to invest 70% to 100% in inflation indexed securities and 0-30% in debt instruments and liquid mutual funds.
Why to invest in SBI MF Inflation Indexed Bond Fund?
- Inflated adjusted returns: This fund objective is to invest in inflation indexed bonds. It would be a good investment option for those who want to lock their money and protect against inflation.
- Capital protection: This invests in inflation indexed bonds and protects your capital.
- Best during rising inflation: When inflation is rising (which we see generally in India), returns from such inflation indexed bond funds would increase. Hence, these are the best investments during rising inflation or during high inflation.
Why not to invest in SBI MF Inflation indexed bond fund?
- Low Returns: It invests in inflation indexed bonds, which offer low returns. The returns could be inflation rate + 1% to 2%. If we assume that inflation is at 5%, you may expect 6% to 7% returns per annum which is very low.
- Cannot beat inflation of healthcare and education: This fund invests in inflation indexed bonds, which provide returns based on the Consumer Price Index (CPI). Hence, you cannot invest in this NFO thinking you can use this for inflation against your future health care protection and education of your child. Inflation of such costs would be very high.
- Better Fixed Income options available: There are several fixed investment options where the returns are between 7% to 11% per annum (like debt mutual funds, NCD, Company FD, Bank FD etc.). These options would discourage investors to invest in this inflation index mutual fund.
- Not good for high tax payers: If you are in a high tax bracket (20% or 30%), past tax returns would be very low. Hence this is not a good investment option for high tax bracket individuals.
Inflation indexed bonds issued by RBI directly earlier, however, there was no much response due to poor marketing and high tax bracket applicable. Some of the FAQ’s about Inflation Indexed Securities can be read at RBI Website here.
Are there any alternative investment options instead of investing in this SBI MF Inflation indexed bond fund?
Instead of investing in this NFO, one can consider investing in tax free bonds, which are available in the stock market right now, which provides 8% to 9% tax free returns.
Also Read: How RBI Monetary Policy would affect you as an investor?
Who should invest in this SBI MF Inflation Index bond NFO?
Investors who are at low risk profile and looking to protect their savings against inflation, can invest in this mutual fund.
Conclusion: RBI has taken several steps to reduce inflation. RBI is aiming to contain Inflation at 8% by January 2015, and bring it down further to 6% by January 2016. Considering this and other negative factors indicated above, I am not in favor of this investment option. Instead of investing in this, one can simply invest in bank FD or high rated corporate FD or tax free bonds to get higher interest rates.
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SBI MF Inflation Indexed Bond Fund
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i would like to have some valuable advice from you ie: i have taken a loan interest @9%/Ann about 5 lak re payment period of 3 years i would like to invest this money in good return where i can gain, off course more than 9% can you suggest me MF,FD,Equity whatever best diversion chart
Haris, There are various options. However since you have taken money on loan, you should not be taking high risk. You can invest in debt funds / liquid funds and move them through STP over a period of 12 months to 18 months to equity funds.
Your analysis always correct RBI taken several steps to reduce inflation at the same the RBI and SBI selling inflation bonds so indirectly they are planning to reduce our returns
I found this blog about two months back about investments and since then I am a great follower of your articles.
My question is : I was having no. of Mutual Funds of about 7L, all of which I have sold few months back. Now I want to purchase afresh. Please let me know the different options for buying fresh MF’s. I want to bypass DP or Agent for this fresh buying. Could you please guide.
Amit, first you should select mutual fund schemes which you want to invest (e.g. HDFC Mid-cap opps fund). Second, visit their mutual fund website. Third, select the link which indicates purchase and select option “Direct”. Remaining process can be guided online
Nice article the II bonds or funds are not suitable for people in 30 % tax bracket . I wish the govt makes them tax free only then it will be attractive else actual returns will not beat the inflation itself
You mentioned tax free bonds are they still available ?
Thx & regds
You can buy tax free bonds from open market. They are available every day.
Thanks suresh…! love it what you do …keep it up