‘Bond’ing With Investors

Bonds or fixed income securities that add stability to one’s portfolio have largely been ignored by the retail investors in India. But lately, there have been some good offerings from corporates like Tata Motors, L&T, etc. Of late, three major companies have announced the issue of bonds. Out of these, two are of new types, i.e. infrastructure bonds from IDFC and L&T Infrastructure Finance Company (L&TIFC) and the third is a general bond from the State Bank of India. Now let us discuss whether to make it a part of your portfolio or not.

An infrastructure bond is the result of the last budget where a new provision for tax-saving investment under Section 80CCF was added to the Income Tax Act. This provision allows for a deduction of `20,000 for investments made in notified long-term infrastructure bonds.This deduction is over and above the deduction available under Section 80C for other investments such as PF, LIC, NSC, etc. But the interest will be taxable. This will be more beneficial for the person who lies in the higher tax bracket (see table). As far as the investor’s exit options are concerned, these bonds have minimum lock-in period of five years.

Nonetheless, these bonds will be listed with the NSE, where one can sell after the lock-in period. There is also a provision for buy-back by the issuer who can exercise call option (redemption) of your investments after a period of five or seven years as the case may be (see table). From the above discussion we can construe that though this is a good investment option for all, it is more suited for someone placed in the higher tax slabs.

Another equally attractive investment option available is from State Bank of India. SBI is issuing bonds (Tier 2) worth `500 crore, with an option to retain oversubscription up to `500 crore, available in two series having maturity of 10 years and 15 years respectively. The issue offers a coupon rate of 9.25 per cent and 9.5 per cent respectively on the same. This rate is higher than the bank’s retail deposits which attract rates substantially lower at 7.5 per cent. Though this does not allow tax benefits as provided by infra bonds, nevertheless the returns are attractive and hence we advise our readers to go for these investments as per requirement.