The Hindu Business Line : ICICI Bonds — Long-term options are attractive

AFTER IDBI, ICICI has followed suit and entered the market with its offer of bonds. The bonds offer a slightly high rate on tax saving bonds compared to that of IDBI. ICICI also has on offer ten-year bonds which, under the prevailing circumstances, appear attractive for high net worth investors.

Incidentally, as in the case of IDBI, the coupon rate offered by Tax Saving Bonds are much lower than what is on offer on bonds that do not offer tax savings. Even on other bonds, the coupon rate appears to have factored in the change in interest rate outlook only partially.

The mark-up over the yield-to-maturity of government securities is less than a percentage point. Given the available alternative in the form of small-savings schemes, these bonds are not attractive except for high net worth investors.

Tax Saving Bonds: ICICI Bonds offer six per cent per annum. This is higher than that of IDBI's 5.5 per cent, but on a par with that offered by Rural Electrification Corporation and Power Finance Corporation.

Still, the bonds offered by REC and PFC appear superior. This is because REC and PFC offer a put option at the end of the third year. Investors can utilise the put option and re-invest the proceeds in higher yielding non-tax-saving options then.

Alternatively, the proceeds can be rolled over into another tax-saving instrument. As tax saving bonds now sport coupon rates that is lower what is offered by competing investment options, it would be appropriate to go in for a lower term to maturity to avail tax benefits. This will ensure that a lower proportion of your overall portfolio is invested in the low-coupon tax saving investments.

Based on balance-sheet strengths, ICICI is superior to the other three. The status of wholly-owned Government of India undertaking enjoyed by the two firms that lend to the power sector, however, increases their safety factor considerably.

As such, investments in REC or PFC can be considered. For investors who have invested in REC Bonds in earlier years, PFC would be a suitable alternative.

Another relevant issue is the attractiveness of deep-discount bonds for investors who would be paying tax on interest. Up to Rs 1 lakh, tax on interest can be offered at the time of redemption. In the case of a five-year bond, the savings work out to be about 0.15 percentage points.

This need not be considered significant. In terms of cash flow re-investment, however, the deep-discount bond is a better option, especially if investors are apprehensive about their re-investment skills. Such investors can consider ICICI's deep discount bond.

Regular Income Bond and Children Growth Bond: Regular Income Bonds offer annual interest while Children Growth Bond is in the nature of a deep-discount bond. Regular Income Bonds offer three options with differing term-to-maturity of five, seven and 10 years respectively. Children Growth Bond offers two options with term-to-maturity of seven and 10 years respectively.

The yield on Children Growth Bond is marginally lower than that of the Regular Income Bond. Both these bonds are not suitable for investors who have not exhausted options such as post-office monthly income scheme, senior citizen's savings scheme and RBI Relief Bonds. These schemes offer higher returns and are less risky compared to ICICI's bonds.

Even the ten-year bonds are not suitable for such investors. The small savings scheme offers a yield that is about one percentage point higher than ICICI Bonds, even as their term-to-maturity is lower at about six years.

If interest rates on mid-term investment options were about 6 per cent after six years, investing in small-savings scheme now would make a better option.

As there is a strong possibility of mid-term small savings investment options continuing to offer more than six per cent, ICICI Bonds are not attractive for such investors.

The picture is entirely different for high net worth investors. High net worth investors actively seek avenues for diversification. These bonds offer diversification. In addition, most high net worth investors are now concerned about the risk of depreciation in value of mutual fund investments due to possible spike in interest rates.

Mutual funds, too, are advising investors to opt for schemes that invest in shorter-term securities. In this context, ICICI Bonds offer an alternative.

The yield-to-maturity, which is about 0.75-percentage point above that on government securities with similar maturities, is modestly attractive.

With interest rates stabilising now and the upward bias moderating considerably, the opportunity to lock into these yields for a long-term of ten years would be attractive for such investors.

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