Last Updated : Jan 23, 2014 02:15 PM IST | Source:

Inflation indexed national saving securities: Analysis

RBI has recently announced the details of the much-awaited Inflation Indexed National Saving Securities for the retail investors; proposed to be launched in the 2nd half of this month

Sanjay Matai

RBI has recently announced the details of the much-awaited Inflation Indexed National Saving Securities for the retail investors; proposed to be launched in the 2nd half of this month. These would be cumulative in nature and hence are designated as Inflation Indexed National Saving Securities - Cumulative or IINSS-C. Non-cumulative securities would be introduced in due course of time.

While the issue dates would be announced shortly, here are the salient features of IINSS-C.

Face Value: Rs.5000
Min Investment: Rs.5000
Max Investment: Rs.5 lakhs per person per annum
Tenure: 10 years

PAN No.: Mandatory for investment of Rs.50,000 or more (excepting a few exceptions)
Availability: With the banks and Stock Holding Corporation of India Ltd (SHCIL)
Eligibility: Individuals, HUFs, Trusts and Charitable Institutions

Rate of interest: 1.5% + Inflation rate [So if inflation is 10%, interest rate would be 11.5%]
Inflation rate: Final rural+urban combined CPI (applied with a lag of 3 months) [So interest for Jan 2014 would be based on inflation in Oct 2013]
Compounding: Half-yearly

Early redemption: Permitted after three years (one year for senior citizens above age 65)
Early redemption dates: Only on coupon dates
Early redemption penalty: 50% of the last coupon

Nomination: Permitted (for individuals)
Transferable: No
Loans: Allowed to pledge as a collateral

Let us now evaluate IINSS-C on the basis of the FIVE parameters on which any investment must be evaluated (as I have done for the 51 most common Investment Products in my latest publication 'Your Guide to Finance and Investments').

1. Returns: At 1.5% over and above the inflation, the returns (with around 10% inflation) are 'presently' quite attractive when compared to similar products like Bank FDs, PPF, Tax-free bonds, PO deposits.

2. Risk: Being issued by Govt. of India, they are 100% safe. However, what if the inflation falls sharply in the future? Then, your returns too will fall. A 5% inflation would mean return of only 6.5%. After all, we are looking at a 10-year scenario and it is impossible to predict the inflation over such a long term. Whereas in tax-free bonds, PO deposits or bank FDs the returns don't change during the tenure of the investment. (In PPF the rates vary every year).

3. Time-frame: At 10 years, it is in line with similar investments.

4. Liquidity: Both loan facility and premature withdrawal provide decent liquidity.

5. Taxation: Interest income from IINSS-C is taxable. Therefore, at the present inflation rates (and hence the interest rates), even a person in the highest tax bracket may earn higher returns in IINSS-C vis-à-vis tax-free bonds / PPF. But if the inflation and rates fall, the post-tax returns from IINSS-C would be lower than tax-free bonds/PPF.

Hence, while IINSS-C compares quite favourably with other similar investments on Returns, Time-frame and Liquidity, the Risk of falling inflation with consequent drop in interest rate and No Tax breaks are a big negative. So after all the drama, IINSS-Cs are somewhat a disappointment.

If the product structure had been maintained similar to the inflation indexed bonds issued to the institutional investors a few months earlier, things would have been somewhat better. They are comparatively more tax efficient than IINSS-Cs. So, tax-wise, IINSS-Cs work well for nil/low income tax bracket investors but not for those in higher tax brackets (In fact, cap of Rs.5 lakhs means that this is not a product for the HNIs). Conversely, nil/low tax bracket investors may not have the risk appetite for fluctuating interest rates, especially downwards.

Nevertheless, it may not always be an 'either / or' scenario. So you could possibly add IINSS-C to your portfolio for a suitable amount, along with other products; provided, of course, you have the financial and mental capacity to withstand the volatility and fall in the interest rates.

The author is a personal finance advisor, author and blogger.

First Published on Dec 11, 2013 03:25 pm
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