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Suresh Krishnamurthy

Tax Savings Bond: Avoid

APART from tax saving bonds, ICICI also has on offer ten-year bonds which, under the prevailing circumstances, appear attractive for high net worth investors.

Tax Saving Bonds: ICICI is offering 5.8 per cent per annum compared to 6 per cent per annum that it offered in February. The tax saving bonds offered by REC and PFC appear superior to ICICI's offering. This is because REC and PFC offer a put option at the end of the third year. Investors can use the put option and re-invest the proceeds in higher yielding non-tax saving options then.

Alternatively, the proceeds can be rolled over into another tax saving instrument. As tax saving bonds now sport coupon rates that are lower what is offered by competing investment options, it would be appropriate to opt for a lower term-to-maturity to avail of tax benefits. This will also ensure that a lower proportion of the portfolio will be invested in the low-coupon tax saving investments.

sRegular Income Bond and Children Growth Bond: Regular Income Bonds offer annual interest while Children Growth Bond is a deep discount bonds. These bonds are not suitable for investors who have not exhausted options such as the post-office monthly income scheme, senior citizen's savings scheme and RBI Relief Bonds.

But for high net worth investors actively seek avenues for diversification, these bonds offer diversification and also better returns. The yield-to-maturity, which is about 0.75 percentage point above that on government securities with similar maturities, is modestly attractive. With interest rates stabilising now and the upward bias moderating considerably, the opportunity to lock into these yields for a period of ten years would be attractive for such investors.

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