ICICI Safety Bonds December 2000

Suresh Krishnamurthy

THE December 2000 offer of ICICI Safety Bonds of ICICI has, apart from its three regular investment options, Tax Savings Bond, Regular Income Bond and Money Multiplier Bond, a Pension Bond for the investor.

Pension Bond: The Pension Bond seems to be targeted at investors who have recently accepted a golden handshake or VRS package, but are not dependent on the sums received for monthly incomes, immediately. While investors may welcome a package which will help them plan their retirement, the Pension Bond does not have any good news whatsoever for an investor.

Click here for Table

The Pension Bond offers three choices for an investor, each providing monthly income after a particular wait period. The yield-to-maturity for all three options is 10.6 per cent. However, considering the long-term nature of the bond, the indicated yield is misleading.

This yield can be achieved only if the income received is reinvested at a rate not less than 10.6 per cent. However, in the case of a pension-seeking employee, reinvestment is not a feasible assumption. If it is assumed that the funds received would not be reinvested, the yield slumps to 6.1 per cent for option 1, 6.6 per cent for option 2 and 7.3 per cent for option 3. For bonds with terms-to-maturity exceeding 16 years, this is certainly nowhere near a reasonable return for investors.

For investors seeking pension incomes, the small savings schemes of the Government -- POMIS, Kisan Vikas Patra and PPF -- offer better investment options for planning retirement. They offer significantly better returns and, at the same time, are relatively less risky. Investors would be better off avoiding the Pension Bond. In fact, it would be worse if implications such as the deduction of tax at source are also considered.

Tax Savings Bond: Tax Savings Bonds offer tax rebate under Section 88 of the IT Act. Two factors make these bonds attractive. One, the low term-to-maturity period. Two, these bonds are the only available investment option for availing the extra rebate that investments in infrastructure bonds qualify for.

These bonds have two options -- I and II. Option II is a deep discount bond which, given the prevailing laws regarding tax deduction at source, appears suitable only for investors in the highest tax bracket. Others can choose this option if the investment is likely to be in only one bond in this financial year. Investment in more than one bond would trigger the TDS requirement at the time of redemption. Option I offers annual interest. The coupon rate is 10.5 per cent. The yields to an investor in both the options are attractive for an investor seeking tax savings.

Click here for Table

For investors seeking choices other than bonds offered by financial institutions, there appears to be some room for optimism. Infrastructure bond offers from more than a handful of companies appear to be on the horizon. Investors willing to wait for a couple of months can avoid this offer. In any case, there is likely to be at least one more opportunity to invest in ICICI Tax Saving Bonds before the end of this financial year.

Regular Income Bonds: Barring the slight increase in coupon rates, the terms of Regular Income Bonds are similar to the November 2000 offer. The term-to-maturity remains unattractive at five years.

Click here for Table

In the case of option I, the yield to an investor who does not re-invest the proceeds, does not compare favourably to that offered by the six-year post-office monthly income scheme. POMIS offers a YTM of 12.84 per cent. In addition, there is no hassle of TDS. Investors seeking monthly income can opt for POMIS instead.

In the case of option II and option III too, the yields for a five-year instrument are more in line with that offered by bank term deposits. In fact, they are higher than that offered by most banks. Still, it may be better to opt for POMIS even if one does not need monthly incomes, and reinvest the monthly proceeds in recurring deposit schemes, since the yield offered by POMIS is substantially higher.

Generally, it appears advisable to avoid bonds with a term-to-maturity of five years or more. Government schemes appear more attractive for long-term investing. Exposures can be taken directly as in the case of small savings or through mutual funds, as needed, for investing in gilts. Another option for an investor seeking annual income is option I of the Tax Savings Bond. As indicated earlier, it has a three-year term-to-maturity. The yield-to-maturity at 10.5 per cent compares favourably to bank term deposits with similar term-to-maturities.

Money Multiplier Bonds: ICICI has come out with four options. In the case of option I, the short term-to-maturity is, indeed, attractive for an investor with high tax incidence. For investors without any tax incidence, an investment in only one bond can be contemplated. Investments in more than one bond would attract tax deduction at source at the time of redemption.

Click here for Table

For option II, the money doubles in six years and six months similar to Kisan Vikas Patra. However, KVP scores on three counts. Starting from the end of 30 months, an investor in KVP has a put option every six months. If an investor so chooses, the funds can be obtained back at a lower rate. Besides, there are no TDS hassles. The risks too are relatively lower. In this backdrop, investors can opt for KVP instead.

In the case of the other options too, the disconcerting factor is once again tax deduction. An investor who wants to receive a lakh of rupees after a period of 15 years and invests accordingly would receive 10 per cent less because of tax deduction at source. This is an excellent arrangement for an investor in the tax bracket, who gets to postpone the incidence of tax. However, for others with unexhausted Section 80-L limits, it is not so. Retrieving back this sum from the IT department may, indeed, become easy 15 years hence. But should investors take the risk?

For long-term investments of 15 or more years, the public provident fund is still the more attractive investment, especially for investors in the tax bracket, since the interest income is wholly tax-exempt. In addition, it is a cumulative instrument such as a money multiplier instrument. The only factor is that a minimum investment of Rs 100 needs to be made each year to keep the account alive. Another advantage in the case of PPF is the relative ease with which loans can be obtained after the lock-in period of a few years.