Inflation indexed bonds

We have been hearing that Reserve bank of India is planning to come out with Inflation indexed bonds. The belief is this will save our investment from being lost because of inflation as the return on investment would be based on the inflation. Internationally this is how it works. You put an amount in an inflation indexed bond at 5% for 10 years. Every year you will get 5% of the interest.

So how is it different from normal fixed deposit? In Inflation indexed bonds the amount invested would change based on the inflation. The adjustment of principle amount would take place on a predetermined date. So if on the predetermined date if the inflation rises by 10%, the principle will rise by 10% and the next interest of 5% would be paid on the new calculated principle. So at the end if inflation goes up, you earn or else you lose.

So we said so many things about inflation and said if it goes up you get more and it goes down you will get less, but which inflation index would be used. Based on the latest information RBI plans to use Wholesale price index, which does not take into account services.

 

So what should we do invest, it all depends on the rate of interest and how inflation is moving. It looks like inflation is coming down, but we need to take a long term view. In the short term it seems to be coming down. Which way would inflation be moving in the long run....Keep guessing.

SIP your way to Financial Health

All of us want to become rich or should we say richer. Whatever we say, we need to grow, be it business, job or money. But sometimes it remains stagnant and the last few years were such a period for the financial markets. Inflation has been going up but the markets have not been giving us returns. So it was the small investors like us who were losing. I know those who had invested in the stock market have just been waiting to get out of the market.

There are some who have redeemed their investments at a loss and the same persons have started investing again as they see the market going up. This pattern of investment does not make money for us, we only lose. But what about those who had invested through Systematic Investment Plan (SIP), they have a different story to tell, they have actually made money. Surprised! Well don’t be, they actually did earn pretty well.

Though many of us know that we can money through SIP, we are very short sighted and start calculating returns with just a few months of investment. We have long term goals but we are short sighted when it comes to investment. The moment we see the market going down we stop our SIP’s, which is wrong. In fact we should continue and you would get units / shares cheap and help in averaging our investment costs.

In fact when the markets pick up, the value of your investment just goes up. SIP of course is not the best way of investing, but it helps in inculcating investment discipline and takes away emotions away from investments. Getting emotional is not good for investment, but intelligent investment is good. In the way we go about we do not have the time to do research and do intelligent investment. Hence discipline in investment is the next best bet.

Starting a SIP is not difficult, in fact every mutual fund has this option, even banks have this option for investing in shares as well. If you plan to invest through SIP in Shares, your research should be good. If not mutual funds are your best bet. Having said all this, we should review the SIP which we have started at regular intervals to ensure that it is giving us the returns we were looking for. I would say reviewing whether to continue or not in a particular SIP should be done once a year.

If after a year you feel that the SIP is not giving you the return you were looking for and find that there is another scheme which would meet your needs, switch. So all the best and SIP your way to financial growth.