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Suresh Krishnamurthy

ICICI has hit the streets with its `Safety Bonds' offer much earlier this year than it did in 2002-03. However, there is nothing much in it to cheer for investors. The coupon rate on the Tax Saving Bonds is lower than what it offers on term deposits and on the Regular Income Bond. Importantly, the coupon rate is a full percentage point lower than what it was in March 2003.

Tax Saving Bonds: With the sharp decline in interest rates in the last couple of years, the value of investing in Tax Saving Bonds is now under question.

However, with the yield-to-maturity on tax saving instruments more than 2.5 percentage points higher than what a conventional instrument can offer, they continue to remain attractive. It is even higher for investors with annual income of less than Rs 1,50,000 as they enjoy a 20 per cent tax rebate.

Importantly, on an after-tax basis, the yields are higher than what the Government of India Relief Bonds offer. Besides, infrastructure bonds remain the only option to obtain the additional tax rebate for investors. In other words, Tax Saving Bonds are as attractive as ever.

However, should ICICI's Tax Saving Bonds be preferred? Bonds of Rural Electrification Corporation are also likely to be on offer within a month's time or so. IDBI too is likely to hit the market in this financial year. The coupon rate on bonds of IDBI and REC may be more than what ICICI offers.

However, ICICI Bonds can be considered less risky compared to bonds of IDBI and REC. In this context, risk-averse investors can consider ICICI Bonds.

If you have chosen to invest in Tax Saving Bonds of ICICI, the next question is whether the three or five-year instrument is more attractive. The coupon rate on the three and five-year instruments are identical. In the case of the deep discount bond options, the YTM is identical.

In this context, investment in the longer-term instrument will be attractive only if the prospect of interest rates remaining stable or declining is stronger.

In the case of Tax Saving Bonds, investment in option II and Option IV are attractive only if we assume that two-year interest rates, three years from now, will be more than 5.8 per cent.

Given the liquidity in the system and other likely events such as a cut in short-term interest rates, that is quite likely. Given this backdrop, it will be better if investors chose the longer-term option.

However, if investors, after the maturity of the bonds, are likely to prefer investing in longer-term options such as 10-year bonds or 15-year bonds or in a completely different asset class such as equity, then the short-term option is suitable.

Options III and I are suitable for investors who have not exhausted the limit under Section 80-L. The Section offers deduction of interest income from specified investments up to Rs 12,000. Options IV and II are suitable for investors who have exhausted this limit and whose cumulative investments in deep discount bonds are less than Rs 1,00,000.

For such investors, investment in option IV and II will enable postponement of tax to the year of maturity.

Regular Income Bonds: Regular Income Bonds offer yields that are identical to that offered by the term deposits of ICICI. The yield of 6 per cent for a taxable seven-year instrument is quite unattractive.

Importantly, senior citizens can obtain higher yields by investing in the fixed deposits of ICICI. However, bonds are unattractive even for other classes for investors. Bonds of the Government of India that offer a taxable yield of 8 per cent and a tax-free yield of 6.5 per cent are more attractive.

Small savings scheme such as Post-Office Monthly Income Scheme too offer higher yields with lower risk. In this context, avoiding the Regular Income Bonds appears prudent.

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