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(Precious) Words of Wisdom : "Never spend your money before you have earned it." ~ Thomas Jefferson

IINSS-C : To invest or not to invest

In yesterday's post 'Inflation Indexed National Saving Securities announced', I had listed down the features of the inflation-indexed securities as announced by RBI last week.

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 will 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-a-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. 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.

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