The Reserve Bank of India intends to introduce inflation indexed bonds (IIBs) to protect investors’ returns from the whims of inflation, as proposed in the Union Budget 2013-14. The government hopes that this will encourage people to save money instead of buying gold. In recent years, the rate of return on debt investments has frequently been lower than inflation, implying that savings have been eroded by inflation. Inflation-indexed bonds provide returns that are always higher than inflation, ensuring that the value of savings is not eroded.
RBI issued two Inflation Indexed bonds
The RBI issued two such bonds in 2013-14, the first in June 2013 and linked to the WPI, which received a poor retail response, and the second in December 2013 and linked to the CPI. With a 10-year term, the latter is known as Inflation Indexed National Savings Securities-Cumulative (IINSS-C). Inflation-linked securities, or simply linkers, are what they’re called around the world.
The final combined consumer price index [CPI (Base: 2010=100)] would be used to determine the interest rate on these securities. The interest rate would be divided into two parts: a fixed rate (1.5%) and an inflation rate based on a three-month lag to the Consumer Price Index (CPI)—for example, if a bond is valued in December, the reference rate will be the CPI from September.
The new offering should attract more interest from savers, especially because it is linked to the CPI rather than the less accurate wholesale price index (WPI). Because it considers increases in the cost of education, food, transportation, housing, and medical care, the CPI is considered a more accurate gauge of inflation’s impact on consumers; the WPI focuses on measuring the prices of traded goods and services.
The first IIBs were issued in India in 1997, and they were called Capital Indexed Bonds (CIBs). However, there is a distinction between these two bonds. While CIBs only protected principal, the new product IIBs protect both principal and interest payments from inflation.
Gold Exchange Traded Fund
Gold ETFs are open-ended mutual fund schemes that closely track the price of physical gold. The ETF is traded on stock exchanges and each unit represents one gram of 0.995 purity gold. The net asset value of each unit is calculated using current physical gold prices and is intended to provide returns that closely track those of physical gold.
e-Gold
Another purchase option is e-Gold, which involves investing in units traded on the National Stock Exchange (NSEL). The investor must have a Demat account with one of NSEL’s affiliates. Because there are no fund management fees, e-Gold has lower brokerage and transaction fees than gold ETFs. Gold can be delivered or sold on the open market.
However, there is a tax disadvantage here: under e-Gold, one must hold the yellow metal for 36 months to qualify for long-term capital gain benefits, which are taxed at 20%. The holding period for ETFs (Exchange Traded Funds) and gold funds to be classified as long-term is only one year. ETFs and gold funds will face a 10% tax without indexation after a year and a 20% tax after indexation. A gold ETF would appear to be the best option for a small investor, as it meets his needs without requiring the creation of a separate Demat account, tax implications, or wealth tax.
CPSE ETF
On April 41, 2014, the Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF), which holds the shares of ten blue-chip PSUs, was listed on the BSE and NSE platforms. The fund was expected to raise Rs.3,000 crore for the government of India, but it was oversubscribed by Rs.4,300 crores.
The Government of India created this scheme to disinvest a portion of its holdings in PSUs, and it will be managed by Goldman Sachs Asset Management (India) Pvt. Ltd., a mutual fund company that specializes in managing exchange-traded funds.
The CPSE ETF tracks the CPSE Index and trades like a stock on the exchange (of 10 PSUs included in the ETF). Companies that meet the following criteria were included in the CPSE Index:
- Owned 55 percent or more by the GoI and listed on the NSE;
- Large PSUs (those having more than X1,000 crores as average free-float market capitalization for six months period ending June 2013); and
- With a consistent dividend payment record (at least 4 percent for 7 years immediately prior to or 7 out of 8/9 years immediately prior to June 2013).
ONGC (26.72%), GAIL (India) (18.48%), Coal India (17.75%), REC (7.16%), Oil India (7.04%), IOC (6.82%), Power Finance Corp. (6.49%), Container Corp. (6.40%), Bharat Electronics (2%), and Engineers India Ltd. are the ten blue-chip PSUs that meet the above criteria and their weights (1.13 percent).
The CPSE ETF will invest the funds in the above-mentioned companies at the weighted average. As a result, subject to tracking errors and expenses, the CPSE ETF’s returns will closely track those of the CPSE Index.
Meanwhile, in the fiscal year 2017-18, the government announced (Union Budget 2017-18) that it will launch a new ETF with diversified CPSE stocks and other government holdings.