Given the coupon rates and tax breaks, investment in these bonds would be a good option
At a time when markets have been volatile with a downward bias, infrastructure bonds offer the dual benefit of a safe haven and reasonably good returns. While there are some limitations, the annualised returns can be as high as 15 per cent a year, assuming that an individual investor who falls in the highest tax bracket, has not exhausted his/her tax benefit under Section 80CCF, and is able to exit at the end of the fifth year.
What’s on offer
As 2010-11 bids adieu, individual tax payers are scouting for avenues to limit their tax liability. There are a host of companies including L&T infrastructure, IDFC, Rural Electrification Corporation (REC), Power Finance Corporation (PFC) and India Infrastructure Finance Company (IIFCL), which have come out with infrastructure bonds, offer to raise money for financing the country’s infrastructure projects (see table).
A quick look at the bonds on offer reveals that the rate of interest ranges between 8 and 8.50 per cent. Of these, the lowest is for REC, while PFC leads the pack with rates of up to 8.50 per cent on cumulative investment for 15 years and 8.30 per cent on non-cumulative option for 10 years.
These bonds have a minimum lock-in period of five years. After which, they will be available for trading on the country’s leading stock exchanges namely, the BSE and NSE. Some companies are also providing an option to buyback these bonds at the end of the fifth year.
For the individual, he or she can save a maximum of Rs 6,180 in terms of tax outgo for the fiscal year ending March 2011. This is assuming the maximum investment of Rs 20,000 which is eligible for benefit under section 80CCF and highest tax rate of 30.9 per cent. Among other options and based on preferences, individuals can choose to invest in a 10-year or a 15-year bond with options of accumulating interest income till maturity or availing it every year.
The best option
The yields on each of the bonds currently on offer are different, thanks to their different offer opening dates. As per the regulations, the rate of interest on these bonds cannot exceed the yields on government securities having similar maturities, 30 days before the issue opens.
So, which is the best option currently? Kartik Jhaveri, a certified financial planner (CFP), says, "The rate of return on these bonds is in the range of 8-8.5 per cent. At 8 per cent the net return (post tax) is 5.50 per cent for a tax payer in the highest bracket. These bonds are more beneficial to people in the 20-30 per cent tax bracket. The ideal option to invest in would be a scheme with the highest coupon rate and an AAA rating".
| HOW THEY STACK UP | ||||||
| Company | Issue Opens | Issue Closes | Face * Value (Rs) | Min. Amt (Rs) | Interest Rate (%) | Ratings |
| IDFC Infra Bond | 28-Feb-11 | 16-Mar-11 | 5,000 | 10,000 | 8.25% pa | “LAAA ICRA & AAA (ind) by Fitch |
| IIFCL Infra Bond | 4-Feb-11 | 4-Mar-11 | 1,000 | 5,000 | 8.15-8.30% pa | AAA by Crisil & "CARE AAA" by Care |
| L & T Infra Bond | 7-Feb-11 | 7-Mar-11 | 1,000 | 5,000 | 8.20-8.30% pa | CARE AA+ by CARE & LAA+ by ICRA |
| PFC Infra Bond | 24-Feb-11 | 22-Mar-11 | 5,000 | 5,000 | 8.30-8.50% pa | “AAA/Stable” from Crisil, & “LAAA with stable outlook” from ICRA |
| REC Infra Bond | 12-Jan-11 | 28-Mar-11 | 5,000 | 10,000 | 8.00-8.10% pa | AAA by CRISIL, "CARE AAA" by Care, LAAA by ICRA, AAA (Ind) by Fitch |
| Most bonds have a maturity period of 10 years and 15 years, with a buyback option at the end of 5 and 7 years, respectively * per bond; Lock-in period for all bonds is five years from the date of allotment Source: Company RHPs | ||||||
Since PFC’s offer opened in second half of February, when yields on government securities of similar maturities had gone up, it has enabled the company to offer higher returns.
To put it in numbers, an investor falling in the 30.9 per cent tax bracket and investing Rs 20,000 in the 15-year cumulative option in PFC’s bonds will get a pre-tax annualised yield of around 11.2 per cent, while a similar investment in IIFCL's 15-year cumulative option will yield about 11 per cent, estimate analysts. But, for those aiming for regular (annual) interest payment option and opting to sell the bond at the end of the fifth year, the internal rate of return (or IRR) works out to be higher at 14.94 per cent.
The exit is possible given that companies are providing the option of buying back bonds at the end of the fifth year. Given the illiquid nature of Indian bonds market, the buyback option at a fixed price provides good comfort.
On the other hand, experts believe that in the event interest rates move down (from the rates being offered currently), it would be worth staying put or by selling the bonds on the exchange (assuming that they will trade at a higher price to adjust for the then prevailing yields).
