How to invest in infra bonds?

Lots of financial institutions use to launch infrastructure bonds and one got a fairly decent tax benefit on them and a lot of Indian put their money in to save tax primarily into these bonds until a few years ago.

Then there was a gap for several years and again this year the government announced Rs 20000 exemption when you invest in an Infrastructure bond. And we are seeing a floury of such bonds finally being launched. So of course 31 March is the date now is over and above the one lakh that one is allowed under your 80 (c) investments or another Rs 20000 more if you go for an infrastructure bond.

Quite obviously lots of questions in all of our minds that should we be investing in these bonds, what the kind of returns do we get, how safe are they, how liquid are they, is it important to be in it, how much of tax can I save?

In an interview to CNBC-TV18, Harsh Roongta, CEO, apnapaisa.com and Vikram Limaye, Executive Director, IDFC gave a perspective on such bonds and how to include them in personal portfolio.

Here is a verbatim transcript of their comments. Also watch the accompanying vidoes for the full show.

Q: Why should I invest in an Infrastructure bond?

Limaye: Its quite clear to me that based on the structure of the bond and the tax adjusted yield that this bond offers to retail investors, this should be very attractive investment for investors. Basically if I had to summarise the IDFC infrastructure bond provides a very stable safe investment. This is rated as a AAA bond so it’s a very safe investment from a credit perspective, the tax adjusted yield that an investor gets for investing Rs 20000 in this bond, if you are in the 20% tax bracket depending on which series you pick could range anywhere from 10.5% to 13.5%.

So on the whole we are paying a coupon of 7.5 to 8%. The tax adjusted yield of 10.5% to 13.5% is much better than anything else that exits in the market place in terms of a fixed income instrument that is equivalent to a AAA instrument.

Q: From a portfolio management point of view let me get another asset class in when we talk of debt and which is debt mutual fund where perhaps the risk compared to the bond like this to my mind would be higher and of course you raised the point about Fixed Deposit / NSC being a good diversification point as well. Here you have a product which over 5 years is giving you the kind of yields that Vikram talked of which are double digit, plus the tax benefit. What do you make of it as a portfolio diversification tool?

Roongta: As I said if you strip away the additional exclusive benefit. We are not talking of the Rs 20000 where they get an exclusive benefit your value goes up but otherwise as I said you have got NSC, you have got PPF. PPF in fact gives you returns that are non taxable although liquidity in a PPF probably is slightly, even with the partial withdrawal facility even then the liquidity is not as good as the bond or a Fixed Deposit.

I would say that a debt mutual fund is good but obviously debt mutual fund doesn’t have any tax breaks. So what might make sense is the FMP’s that you have because FMP are now structured so that you get the benefit of indexation and more than one year so that the tax rate becomes almost minimal and there the returns that you get are pretty good and it is reasonably safe not a guaranteed return, there is not even an indicative return’s that’s not allowed but the returns are good post tax and reasonably safe.

Q: I have not invested in bonds before, but would like to begin now. What kind of tax benefits can I get if I invest in infra bonds. I have Rs 1 lakh rupees to invest.

Limaye: You got to keep in mind which entity you are investing with since we are talking about infrastructure bonds IDFC is a very qualified institution because we are an infrastructure focused institutions so we know what we are doing. The use of proceeds of this bonds have to be invested for infrastructure financing so that is what we do for a living and so we understand what we are doing. As I mentioned earlier we are an AAA entity so this is a very safe investment for some body who has not ventured into bonds earlier. He is not taking high risk when he is investing in an IDFC bond.

The tax benefit is available upfront. So while the benefit is restricted for Rs 20,000 as investment if someone has a Rs 100,000 to invest in these bonds on a weightage average basis although the tax benefit is restricted to Rs 20,000 the weightage average yield on Rs 100,000 investment could also be 50-75 basis point better than fixed deposit yield that an investor is likely to get today. So even if the investor has to invest Rs 100,000 the adjusted yield ion a weighted average would be better than the alternative investment that he would make in a fixed deposit.

Q: Taking ahead from what Vikram just mentioned – two points really that came out – one is if I were to compare this with a fixed deposit according to you makes better sense to be in it because a fixed deposit pretty much have a five year lock in if I want that tax benefit. Secondly the point he made about the safety. IDFC is an institution but at the same time there are if I am not mistaken all these institutions are going to be allowed to raise these infrastructure bonds are going to get the approval of the governments so it is not that it is anybody who can come in walk in and start floating these bonds.

Roongta: Absolutely I think clearly these needs to be notified but more importantly if the tax break is not there or this Rs 20,000 is exclusive to infrastructure bond but the others you have things like NSC that gives you slightly better return because the interest is compounded 6 monthly. They are liquid. You can take a loan against them. There is provision for your ability to surrender them before time etc. So clearly as far as the Rs 20,000 exclusive allowance is concerned it increases the yield quite a lot but for anything else there would be other comparable if not better instruments liquidity is not compromised and which might yield better returns.