Huge response to DHFL’s inflation-linked bonds, here is what made it attractive

Huge response to DHFL’s inflation-linked bonds, here is what made it attractive

The first Inflation – Linked Bond is here, sees tremendous response

India’s first public offering of inflation bound, Consumer Price Index-linked bond issued by Dewan Housing Finance Ltd received overwhelming response with bids worth Rs 19,000 crores on the day of opening which was nearly 5 times the issue size of Rs 1,000 crore, with an over-subscription option of Rs 3,000 crore. While the issue was scheduled to be open from August 3-16, the company announced the closure of the offer on the second day itself.

The overwhelming response might lead to similar offers hitting the market from other issuers. But was the investor rush justified and how should you react if such offers come into the market in future?

Investment advisor, Anil Rego, points out that DHFL’s CPI-linked bonds had attractive features and could be considered for investment if more such issues hit the market. “It does make sense for investors to subscribe to such bonds in the future too. The bond should be part of fixed income investment allocation. Bonds should make up only a part of a person’s assets,” Rego, founder and CEO, Right Horizons, told FeMoney.

Also Read: Contingency Fund is critical for Every Salaried Individual

For retail investors, DHFL’s had offered bonds with 3-year maturity at interest rate of 4.18 percentage points above the previous year’s average CPI (which at present stands 5.02 per cent). This worked out to an effective rate is 9.20 per cent for the first year. The company said that from the second year the rate of interest will be reset with respect to the previous year’s average CPI number.

For non-retail investors, the rate of interest in the first year is 9.10 per cent.

The bonds have a lower and an upper cap on interest rate. As such, the annual rate of interest cannot fall below 8.90 per cent, nor can it rise above 9.50 per cent.

Rego felt that the lower cap on the bonds work well for investors. “The world has been moving towards lower inflation, and major economies are even worried about deflation (negative inflation, or falling prices). India has seen falling inflation. Inflation may fall further to about 4 per cent,” he pointed out.

He said investors could consider bonds that offer fixed rates in excess of 9 per cent, if the credit rating provides high safety. “Returns of 8.9-9.5 per cent on these bonds compare favorably with 7.75-8 per cent offered on bank fixed deposits – with both having identical taxation,” Rego said.

Source: Financial Express

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