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Suresh Krishnamurthy

ICICI Bank's second offer of Safety Bonds for this fiscal is now open for subscription. The yields on offer are lower than what wasoffered in January. This is in contrast to the spike in the yields of government securities since January. Investors may, therefore, avoid the offer. However, the yields are higher than that of ICICI Bank's term deposits. For term deposit investors, that is an attractive feature.

There are only two options on offer — Tax Saving Bonds and Regular Income Bonds — compared to three in the January offer. Unlike in earlier years, where ICICI offered a number of options, the Safety Bonds this year comes with only a few options.

The income on these bonds is eligible for deduction under Section 80-L of the Income-Tax Act. However, investors need to bear in mind that if the Kelkar Committee recommendations are accepted, then income, which was deductible earlier, will henceforth get taxed.

Regular Income Bonds: There is only one option on offer — a seven-year bond with a yield to maturity of 6.8 per cent.

ICICI offers 6.5 per cent for term deposits with terms to maturity of 2-10 years. Senior citizens get 7 per cent. On the other hand, the rates are lower than that offered by IDBI. IDBI's risk profile, though, can be considered higher than ICICI's.

Still, the long term-to-maturity of the bonds is unattractive. This is because of the sharp fall in interest rates last year and the prospect of a rise in the rates a few years hence. Investors would be better of taking exposures to longer-term securities through mutual funds.

Besides, the post office monthly income scheme continues to provide attractive yields. In fact, they will provide relatively attractive yields even after the expected rate cut in March . So, it would be better for most classes of investors, including term deposit investors,to avoid these bonds. .

Tax Saving Bonds: There are four options on offer. Options II and IV are deep discount bonds, while I and III pay annual interest.

Interestingly, both the three- and five-year options offer an identical coupon rate of 6.75 per cent. The coupon rate on ICICI's Tax Saving Bonds is 0.75 percentage point lower than that offered by similar bonds of the Rural Electrification Corporation.

The 5-year bonds, prima facie, appear more attractive than the three-year ones. Investment in the former would be justified only if interest rates on two-year investments, three years hence, are lower than 6.75 per cent.

The probability of a fall in yields on shorter-term securities is high. However, the higher yield on REC bonds suggests that ICICI's can be avoided altogether. Interest rate on REC bonds would be reset after three years.

However, there is a put option for investors, which they can exercise if need be. In this backdrop, the tax saving bonds of ICICI can be altogether avoided.

Those who have already invested in ICICI's Tax Saving Bonds in earlier years would also benefit by choosing REC bonds. That would diversify the portfolio and also offer better returns. Indeed, in terms of risk, that of ICICI Bank should be considered lower than REC's. However, given that the Government of India wholly owns REC, the higher risk need not be a deterring factor.

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