The Hindu Business Line : TNPF scheme: An attractive debt option

Even as 2008 turned out to be a sore year for equity investors, debt offered solace to a great extent, with attractive interest rates and yields. However, the falling interest rates in 2009 suggests that attractive debt options could be more difficult to come by. Bank deposit rates have fallen to 9-9.5 per cent for maturity periods between 1 and 3 years.

Under these circumstances, an interest rate of 11.0 per cent per annum on deposits for a 3-5-year period offered by Tamil Nadu Power Finance & Infrastructure Development Corporation (TNPF) appears to be an attractive option. Senior citizens would enjoy a maximum interest rate of 11.5 per cent (for the above-mentioned period).

Investors willing to take risks – marginally higher than bank deposits but lower than equity investing, can consider deposit options from TNPF. This is a non-banking finance company, wholly-owned by the Tamil Nadu Government, and offers deposits ranging from 12 months to 5 years.

Funding power

TNPF mobilises funds through deposit schemes. The funds are utilised towards power and infrastructure projects and to fund the State electricity board. The company does not have any non-performing assets on its books.

However, TNPF primarily funds the state electricity board, whose financial condition has not been very encouraging, thus increasing risk of a default. Investors should, therefore, bear in mind that the investment carries higher risk than a bank deposit.

The deposits schemes, unlike bank deposits, do not also carry any insurance cover.

Options

TNPF offers interest payout scheme and cumulative interest scheme. The minimum period of investment under the payout plan (quarterly and annual) is two years and the minimum investment for this period is Rs 10,000. However, the monthly interest option is available only for investments of three years and above with a minimum amount of Rs 20,000.

The minimum investment under the cumulative scheme is Rs 10,000. Interest earned under any of these schemes is subject to tax. Investors can also avail a loan at an interest rate of 1 per cent above their deposit interest.

The deposit scheme of TNPF offers attractive yields compared to bank deposits (see table for yields). Further, interest is calculated on a monthly cumulative basis, as against the usual quarterly interest calculation made for bank deposits.

A bank deposit earning 9.5 per cent compounded quarterly for, say, three years gives a gross annualised yield (before taxes) of 9.7 per cent. As against this, a three-year TNPF cumulative deposit scheme earning 11 per cent returns an annualised yield of 11.5 per cent.

Senior citizens/investors in the lower end of the tax slab are likely to enjoy superior yields compared to those in the 30 per cent tax slab, especially under the cumulative option. Investors in need of regular income can consider opting for interest payouts.

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