What are Inflation Indexed Bonds?

You must have a basic understanding of inflation. It is when the prices of goods and services rise over time, which means your money can buy less. If inflation goes up, the same amount of money will not get you as much as before. This is often a concern for people who invest their money as inflation reduces the value of their savings. To solve this issue, the government offers inflation-indexed bonds. Now, what are the bonds? In short, these bonds are all there to adjust to inflation. With this blog, let’s understand more about what inflation-indexed are bonds, how they work, their benefits, and who should consider them.

What Are Inflation-Indexed Bonds?

Inflation-indexed bonds, also called inflation-linked bonds or inflation-protected bonds, are the bonds that would help protect your money from inflation. These bonds as different from regular bonds as when you invest in regular bonds, they pay you a fixed amount. However, inflation-indexed bonds change based on the inflation rate. Hence, if inflation goes up, then the bond’s value and the interest you get also go up. In India, the government offers these bonds to make sure that investors’ money keeps up with rising prices.

How Do Inflation-Indexed Bonds Work?

Wondering how inflation-indexed bonds work? In simple terms, these bonds are linked to inflation usually through an index like the Consumer Price Index (CPI), which tracks the prices of goods and services. So, here’s how they work:

• If inflation goes up, the value of the bond, which is also the principal, also increases. For example, if you invest ₹1,000 and inflation rises by 5%, then your bond’s value would be adjusted to ₹1,050.
• The interest is paid based on the adjusted principal. So, if your bond pays 2% interest and the principal becomes ₹1,050, then you would earn interest on this higher amount.

Types of Inflation-Indexed Bonds

Depending on inflation, there are a few types of inflation-indexed bonds:

1. Capital-Indexed Bonds: Only the principal, which is the amount you invest, changes with inflation, but the interest rate stays the same.
2. Interest-Indexed Bonds: With them, the interest changes with inflation, but the principal stays the same.
3. Combination Bonds: Both the principal and the interest get adjusted according to inflation.

In India, the most popular common type is capital-indexed bonds.

Benefits of Investing in Inflation-Indexed Bonds

Investing in inflation-indexed bonds comes with a number of benefits and the major ones are as follows:

• With inflation-indexed bonds, your investment and returns would adjust with inflation, and this makes sure that rising prices do not reduce the value of your money.
• As these bonds are issued by the government, they are very safe and come with low risk.
• If you are investing for the long term, then these bonds would help you maintain the value of your money over time by providing inflation-adjusted returns.

Inflation-Indexed Bonds vs. Regular Bonds

In the comparison of inflation-indexed bonds vs. regular bonds, the significant differences are:

• Regular Bonds: Pay a fixed amount of interest. However, if inflation rises, your investment may lose value as your returns will not keep up with higher prices.
• Inflation-Indexed Bonds: Adjust with inflation and ensure your investment keeps its value even when prices rise.

Who Should Invest in Inflation-Indexed Bonds?

You should invest in these inflation-linked bonds:

• If you prefer safe investments and do not want to worry about inflation affecting your savings.
• If you are saving for retirement or other long-term goals.
• If you look forward to relying on fixed income during retirement.

Also Read : Tax Saving Investments Vs High Return Investments

Conclusion

So, if you want to keep your money safe from inflation while ensuring your returns grow with rising prices, then do invest in inflation-indexed bonds. But if you are looking for something more exciting with higher returns, then download the 13Karat app.

13Karat Investments offers great options for your investments! You can earn up to 12% per year through P2P lending or enjoy even higher returns of up to 16.1% per year with NCDs (Non-convertible debentures).

Download the app and grow your money faster while staying secure!