• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Suresh Krishnamurthy

THE rates on offer in the case of IDBI Flexibonds, which is open for subscription, are more attractive than that offered by ICICI Bonds.

However, they are still lower than what is offered by small-savings options. As such, small investors may not find the offer attractive, except for Tax Saving Bonds.

Tax Saving Bond: The rate on offer is marginally higher than that offered by ICICI and Rural Electrification Corporation.

The yield-to-maturity on these bonds is slightly more than 10 per cent. Given the prevailing interest rate scenario, the yield is attractive.

There are four options on offer. The first two offer annual interest and the other two are in the nature of deep discount bonds.

Deep discount bonds are tax-inefficient if one holds a portfolio of such bonds with a total investment in excess of Rs 1 lakh. In such a case, the tax treatment changes makes investing in deep discount bonds unattractive.

However, for investors with less than Rs 1 lakh invested in deep discount bonds, these bonds are attractive provided the limit under Section 80-L is already exhausted. If it is not, it would be better to opt for the annual interest payment option since it would provide better after-tax returns.

Option A and C of the Tax Saving Bonds have a lower term-to-maturity compared to options C and D.

Given the prevailing interest rate scenario, opting for longer term options appear sensible.

However, if after three years, investors wish to park their money in substantially long-term debt securities of, say, 10 years or more or invest in an altogether different asset class such as equity, then the shorter-term option would be preferable.

Other bonds: IDBI is offering three other options for investors — Money Multiplier Bond, Retirement Bond and Regular Income Bond. Compared to small-savings schemes, the yields on offer are not attractive.

So, if investors have not exhausted the limits available for investment in small-savings schemes, avoiding the IDBI Bond appears prudent.

However, compared to other investment options, the yields on IDBI Flexibonds are attractive.

For instance, the 10-year regular income bond offers 6.5 per cent. This is higher than the yield of about 5.20 per cent that a similar government security offers.

Similar rated securities or bank term deposits also offers much lower rates for retail investors.

In this context, investors with larger sums to invest can consider parking a portion of their surpluses in the 10-year and 15-year Regular Income Bond.

The Money Multiplier Bond is generally not suitable for investors with surpluses of more than Rs 1 lakh, since it is not tax efficient. On the other hand, for those with smaller sums, small-savings schemes are more suitable. As such, the Money Multiplier Bond appears unattractive to most investors.

The retirement bond is suitable for investors preferring annuities, which are regular monthly payments including interest and a component of the principal.

However, there are more tax-efficient and long-term annuities offered by LIC available in the market. As such, investors can avoid the Retirement Bond.

Article E-Mail :: Comment :: Syndication

Stories in this Section
The principal-agent problem

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line