Deutsche MF files for first-ever inflation-indexed bond fund

The fund aims to generate income and returns in line with inflation by investing in a portfolio of inflation indexed bonds

Deutsche Mutual Fund has filed documents with the Securities and Exchange Board of India requesting permission to launch the first-ever debt scheme that would invest in inflation-indexed bonds.

“The fund seeks to manage a portfolio of predominantly inflation-linked bonds (ILBs) to provide an inflation-adjusted return while maintaining a balance between liquidity and profitability of the investments,” said the filing.

“The fund manager seeks to extract value from the interplay of real and nominal interest rates. The fund would use a combination of portfolio strategies like yield curve positioning, duration, relative value positioning and other tactical strategies,” it added.

The scheme will have a minimum investment size of Rs 5,000.

It has a mandate to invest 70-100 per cent in inflation-indexed securities. It can also invest in debt securities, including money market instruments, to the extent of 30 per cent of its assets.

The first sale of inflation-indexed bonds was on June 4 and another on June 25. Both were fully subscribed.

Suresh Sadagopan, founder, Ladder7 Financial Advisories, suggested the inflation-indexed bond security is not the best debt instrument for investors because of its reliance on wholesale price index (WPI) inflation than consumer price index (CPI) data. The WPI inflation for May was 4.7 per cent compared to CPI’s 9.31 per cent.

“This means the net pre-tax returns are not as attractive as available from debt funds or even bank deposits,” he said.

Sadagopan estimates that compared to bank deposits, which provide nine per cent returns, and many income funds which provide returns in excess of ten per cent pre-tax, the returns for inflation bonds are around eight per cent.