Infra bond issue closes August 31, 2010

This year’s first infrastructure bond, issued by IFCI Ltd, closes tomorrow. The bond is the first of its kind since the finance minister announced in the Budget that an additional deduction would be allowed on investments in infrastructure bonds. The IFCI bond is eligible for this deduction.

The IFCI issue has two variants. The first comes with a buy-back option, where there is a lock-in period of five years and the rate of interest is 7.85 per cent. The buy-back option allows the investor to hold the bond up to 10 years, while giving one the freedom of redeeming anytime after the fifth year.

The second has a tenor of 10 years and gives a slightly higher interest rate of 7.95 per cent. This does not come with a buy-back option, which means one cannot hold it beyond its tenor of 10 years.

In both the variants, one can choose between an annual interest payout, payable on 15 September every year, and a cumulative payment at the time of maturity or redemption.

Investment of Rs20,000 in this bond entails full tax deduction benefit and are in the highest tax slab of 30.9%, you will save Rs6,180 in taxes. The net investment, therefore, comes down to Rs13,820. Now, if you have opted for an annual interest payout, you earn an effective yield of 14.54% (post-tax). But if you opt for cumulative payment, the effective yield comes down to 13.77%.

The yield is lower because you are taking your interest every year and not leaving it to enjoy the benefit of compounding.

Since the bond would be listed on the Bombay Stock Exchange (BSE), one needs to have a demat account to invest in it. Indian residents and Hindu undivided family can invest in this bond by filling up an application form and mentioning the demat number. The minimum investment amount is Rs5,000.

The bond comes with a lock-in period of five years from the day the units are allotted. Since the bond will be listed on BSE, investors would have the option to exit through the secondary market, but only after the lock-in gets over.

The last day of allotment of units for the IFCI bond is 15 September, the day it gets listed on BSE.