Should you invest in long term infrastructure bonds?

Long term Infrastructure Bonds

After IFCI, its now IDFC and L&T Infra turn to tap the markets with their long term infrastructure bonds. After analyzing these offers, we are of the opinion that investors should invest in these tax saving instruments and not wait till the last minute to better plan their tax es.

Both the companies have the same coupon rate (9 per cent) and tenure (10 years) and hence one can invest in either of the two. Both companies will be issuing in one or more tranches, subject to their fund raising limit. However it is not advisable to wait for the next lot as the interest rates might differ. This is evident from the fact that IFCI bonds, which closed on 19 November 2011, offered interest rates of 8.50 and 8.75 per cent on 10 and 15 years respectively.

Long term Infrastructure bonds are treated under section 80 CCF of the Income Tax Act 1961. Investments in such bonds offer an income tax deduction of Rs 20,000 in addition to the Rs 1,00,000 under section 80 C. These bonds can be issued by IFCI, LIC, IDFC and non banking finance companies (NBFCs) classified as infrastructure finance companies by the Reserve Bank of India. The bonds will be available for a tenure of minimum 10 years and with a lock-in period of five years. Only Resident Individuals (Major) and HUF s can invest in these bonds. The interest earned on these bonds is however taxable.

IDFC bonds will be issued in one or more tranches not exceeding Rs 5000 crore for fiscal 2011-2012. The two options available are

- Option I with annual Interest payment
- Option II with cumulative payment.

Both the options have a coupon rate of 9 per cent and a tenure of 10 years The minimum application amount is Rs 10000 (2 bonds of Rs 5,000 each) and subsequent applications can be made in multiples of one bond (Face value Rs 5,000).

The issue opened on 21st November 2011 and it closes on 16th December 2011. The bonds will be listed on BSE and NSE &  have a buy back option at the end of five years.

L&T Infra is also tapping the market to raise up to Rs 1100 crore in one or more tranches in the financial year 2011-2012. The issue for L&T Infra opened on 25th November 2011 and will be close on 24 December 2011. There is not much difference between what L&T Infra & IDFC are offering. The coupon rate and the tenures are similar. However the minimum application for L&T Infra's bond is Rs 5000 (5 bonds of Rs 1,000 each) and it has an additional buy back option at the end of the 7^th year. Also, L&T Infra bonds will only list on the Bombay Stock Exchange (BSE)

We feel that both companies have sound management and good financial performance. We feel that investors can opt for either of the two companies. However if you want to exit at the seventh year,  choose L&T Infra which will help you get a smooth exit.

We would advise our investors to select Option I (in both the bonds) where they can get the best yield to maturity and should use the buyback option at the fifth year.

The following is table which shows the comparison of two companies and the options which are offered by them for investment:

Effective Yield to Maturity