Infrastructure bonds for the risk-averse

Dec 07 2012, 10:33 IST
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SummaryBankBazaar.com CEO Adhil Shetty on how REC Tax-Free Secured Redeemable Non-Convertible Bonds stack up.

The government has major plans for infrastructure development in the 12th Five Year Plan. The need for infrastructure is pegged at $1 trillion. Keeping in view the massive need of funds, many firms in India have launched infrastructure bonds. Letís look at one such example. Rural Electrification (REC) is one of the most well-known companies to issue an infrastructure bond. On December 3, it launched the REC Tax-Free Secured Redeemable Non-Convertible Bonds.

At a glance

The issue opened on December 3 and closes on December 10. The use size for retail investors is 40% of the total issue, which means about R4,500 crore. The bond is available in both demat and physical form. Hence, people without an online account can invest in it too.

REC is one of the Navratna companies and, hence, investing in this bond is a very low-risk investment. It is also supported by the rating provided by rating agencies such as Crisil, Care and Icra. Moreover, a large part of the company is held by the government, making it almost risk-free investment.

Should you invest?

The answer depends on what you want from this investment. Letís look at some of its features.

Safety: The investment is absolutely safe. The company is financially sound, highly rated by rating agencies, and owned by the government. This makes the risk of default almost nil. A high rating of AAA shows the company is financially sound to fulfill its obligation to bondholders.

Returns: The returns are in the range of 7.72-7.88%. This is not great as such, but when you consider the non-existent risk, it is quite good. This is even more valid when you see that the returns on other safer options have reduced.

Tax-saving feature: The returns earned by investing in REC bond are tax free. When you consider 7.72-7.88% returns with tax savings, the investment looks very attractive. Investors are eligible for tax deduction under Section 80CCF of the Income tax Act. This means investors can save R6,180 if they fall in the highest tax bracket 30.90%; R4,120 if they are in the tax bracket of 20.60%; and R2,060 if they fall in the tax bracket of 10.30%.

Capital gain potential: Typically, when the interest rates go down, bond prices go up. Interest rates seem to have peaked in India. There is a very high possibility that the rates will start moving down from here. When this happens, investors will also gain in terms of bond

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