RBI's Inflation indexed Bonds: Not so attractive

Inflation Indexed Bonds: 

Security which gives guaranteed higher rate of return than the average rate of inflation, which is one risk free investment product were we can beat the rising inflation rate. 

GOI(Government of India) is offering one such Inflation indexed bonds based out of CPI(consumer price index) rate. 

We can apply for this bond before 31st march 2014 through SBI, Nationalised banks, ICICI, HDFC Bank, Axis bank and SHICL.  

Overview of the Bond: 

• Minimum investment of Rs.5000 and up-to Rs.5,00,000.
• Tenor of Bond: 10 year, however early redemption is available for senior citizen after 1years and after 3 years for all others.
• Rate of Interest we will be getting for 1 year investment period: Base rate of 1.5% + Inflation rate of combined consumer priced index (compounded half-early).
• For example, if the average CPI is around 10% for FY'15, then the annual return we get is 11.5%(CPI + Base rate).

Note: GOI reverses the right to close the investment early.

Some of the Key Highlights of this Bond:

1. Security can be pledged as a collateral for taking loans
2. Can nominee one or more persons including NRIs

Who can apply for this bonds ?

Individuals which includes NRIs, retail investors, HNI's, HUFs; also charitable institutions and universities are eligible to apply.

Things use should know before buying this bond: 

• Average CPI rate trend for past 5 years, 

• 2014 - 7.24%, 2013 - 10.92%, 2012 - 9.3%, 2011 - 8.87%, 2010 - 12.11%, 2009 - 10.83

From the above value the average rate of return of the CPI linked bond for past 5years is around 10.02% (which includes the base rate as well).  

Average rate of interest we get from this bond is slightly above the fixed deposit which is only locked for one year only, whereas in case of this bond the maturity period is more than 10 years. 

• Also Urijit Patel committee(Formed by RBI to fight against Inflation) targets to reduce CPI rate to 6% in 24months, the committee proposed plans to tame against inflation. So what if the average value of CPI comes down as expected ?. 

In my opinion this bond is really unattractive even after RBI arise the base rate from 1% to 1.5%. Its always good to make wise investment decision by spending some time on analysis, I would like to rate 2.5 out of 5 for this bond. 

Sources: RBI, Economies times. 

Happy Investing!

New ETF under RGESS tax benefit- high risk high return model

CPSE ETF:  CPSE is nothing but Central Public sector Enterprise such ongc,sbi,gail,etc.. , is an ETF which suits for long term investors, where new retail investors can claims tax benefit under RGESS(50% tax claim)  upto Rs:50,000 i.e if you invest 10k you can claim for 5K tax benefit. And the minimum lock-in period is 1 year, but we can extend the tax benefit for additional 2 more years. 

Goldman Sachs, which got the mandate from the Government of India for marketing the CPSE ETF, has announced the details of the NFO(New fund offer) that is opening for subscription for Anchor Investment on 18.03.14 and for Non-Anchor investors from 19.03.14 to 21.03.14. 

Please click here for official ad.

What is CPSE ETF?

CPSE ETF is a unique opportunity for investors to invest in 10 Maharatnas, Navratnas and Miniratnas at a discount of 5% on the “Reference Market Price” of the underlying shares of CPSE Index, which will be offered to the CPSE ETF by the Government of India. 

This is one of the novel disinvestment way initiated by  GOI to generate 3000cr, thereby it achieves the revised disinvestment target of 16000cr for FY'14.  

Basket of Companies which comes under CPSE index: 

Company Name	Sector	% Weightage
Oil & Natural Gas Corporation Ltd.	Energy	26.72
GAIL (India) Ltd.	Energy	18.48
Coal India Ltd.	Metals	17.75
Rural Electrification Corporation Ltd.	Financial Services	7.16
Oil India Ltd.	Energy	7.04
Indian Oil Corporation Ltd.	Energy	6.82
Power Finance Corporation Ltd.	Financial Services	6.49
Container Corporation of India Ltd.	Services	6.4
Bharat Electronics Ltd.	Industrial Manufacturing	2
Engineers India Ltd.	Construction	1.13

Advantage of investing in CPSE ETF:

1. Offers Tax Benefits as the Scheme is in compliance with the provisions of Rajiv Gandhi Equity Savings Scheme, 2013 (‘RGESS’). 

2. We get the CPSE ETF at 5% discount rate( refrence market price).

3. CPSE index had a PE ratio of 10.52 and dividend yield of 3.51%.

4. One Loyalty unit will be awarded for every 15 units hold by retail investor for more than 1 year. 

5. provides consistent dividend every year.

Comparison b/w other ETF's

* as on feb28

How to buy CPSE ETF: 

• Need to have DP(Depository Account) to subscribe for this NFO. 
• and we can apply via equity brokerage house like karvay,Geojit,etc.

Other advantage: 

Good time to invest in Central public limited companies at this point of time, Since more than 55% amount of fund money will be spend on sector which is turning around with stable oil price and less loss making due high diesel price. Also due to is cheaper valuations book value of the CPSE index is only 1.8 and PE ratio is only 9.8. And apart from this it pays attractive dividend y-o-y with good dividend yeild at 3.77% which is one of the index which yields high returns in comparison to other ETF's in the table above.  

Happy investing !