14.28         ndian    onom
     introduce inflation-indexed bonds (IIBs)—it was
     proposed by the Union Budget 2013–14. The
                                                               golD exchange traDeD funDS
     government hopes this will help increase financial     Gold Exchange Traded Funds (ETFs) are open-
     savings instead of buying gold. In the recent years,   ended mutual fund schemes that closely track the
     the rate of return on debt investments has often       price of physical gold. Each unit represents one
     been below inflation, which effectively means that     gram of gold having 0.995 purity, and the ETF
     inflation was eroding savings. Inflation indexed       is listed on stock exchanges. The net asset value
     bonds provide returns that are always in excess of     of each unit is calculated based on the prices
     inflation, ensuring that price rise does not erode     of physical gold prevailing on that day and is
     the value of savings.                                  designed to provide returns that would closely
           In 2013–14, RBI launched two such bonds          track the returns from physical gold.
     —the first one in June 2013 linked with the WPI
     which had a very weak retail response and second       e-golD
     one in December 2013 linked with CPI. The              e-Gold is another purchase option, involving
     latter one is called as Inflation Indexed National     investments in units traded on the National
     Savings Securities-Cumulative (IINSS-C) with           Stock Exchange (NSEL). Here, the investor is
     a 10 years tenure. These are internationally known     required to have a demat account with an affiliate
     as inflation-linked securities or simply linkers.      of NSEL. e-Gold’s brokerage and transaction
     Interest rate on these securities would be linked to   charges are lower than gold ETFs as there are no
     final combined consumer price index [CPI (Base:        fund management charges. One can take delivery
     2010=100)]. Interest rate would comprise two           of gold or sell it in the exchange.
     parts: fixed rate (1.5 per cent) and inflation rate,
                                                                  But there is also a negative point here from
     based on three-month lag to CPI—thus, if a bond
                                                            the tax angle—under e-Gold, one has to hold the
     is being valued in December, the reference rate
                                                            yellow metal for 36 months to enjoy long-term
     will be CPI of September. The new offering should
                                                            capital gain benefits, and this is taxed at 20 per
     attract higher attention from savers, especially due
                                                            cent. For ETFs (Exchange Traded Funds) and
     to its link to CPI instead of wholesale price index
                                                            gold funds, the holding period to be classified
     (WPI), which is a less accurate gauge of inflation.
                                                            as long-term is only one year. After a year, ETF
     CPI is considered a more accurate gauge of the
                                                            and gold funds will suffer 10 per cent tax without
     impact of inflation on consumers because it takes
                                                            indexation and 20 per cent after indexation. For
     into account increases in the cost of education,
                                                            a small investor, gold ETF would appear to be
     food, transportation, housing and medical care; in
                                                            the best option, as it meets his needs without
     WPI, the emphasis is on measuring the prices of
                                                            difficulties in terms of creating a separate demat
     traded goods and services.
                                                            account, tax implications and wealth tax.
           It was in 1997 that the IIBs were issued for the
     first time in India—named as the Capital Indexed
                                                               cPSe etf
     Bonds (CIBs). But there remains a difference
     between these two bonds. While the CIBs                The Central Public Sector Enterprises Exchange
     provided inflation protection only to principal the    Traded Fund (CPSE ETF) comprising the
     new product IIBs provides inflation protection         shares of 10 blue chip PSUs was listed on the
     to both the components—principal and interest          BSE and NSE platforms on 41 April, 2014. The
     payments.                                              Government of India expected to raise a corpus