Every week, we look at equity related offerings. This week, lets step aside and look at some debt offering. IDFC is coming with an Infrastructure Bond issue which closes on October 18th 2010.
The government has issued a notification that an additional amount of Rs 20000 can be invested in, other than your limit of 1 lakh rupees under section 80. This means this Rs 20000 will be exempt from your taxable income this year. Depending on which tax slab you fall under, 10 %, 20% or 30 %, you will save additional income tax of Rs 2000, Rs 4000 or Rs 6000 respectively. (I am not computing the surcharge amount- the real rate of taxation can be 10.3%, 20.6% or 30.9%)
In addition to this, you get 4 different options of investment as below. The bonds have a lock-in period of 5 years and have a maturity period of 10 years. 2 options are cumulative ones and 2 are annual interest options. For the bods yielding 7.5%, after 5 years the company will give a buyback option and for those yielding 8 pc no buyback option.
I would invest in the 8 pc option bonds as even if there is no buyback option, the bonds are listed on the NSE and can be traded after the lock-in of 5 years.
IDFC is a triple A rated paper, interest rate of 8 pc, along with the tax benefit makes these bonds one of the best investment options going around.
Please note the interest is taxable and will attract the normal rate of taxation. With the tax break the real return actually works out to as high as 12-14 pc pre-tax.
Also, even though the benefit of tax breaks is only 20000 rupees, one can invest higher amounts. The 10 year bond yield is around 8 pc.
At current market valuations, debt is another option one must look at as interest rates may peak after maybe another 100 basis points hike. Bond yields and bond prices are inversely proportional. When rate cuts come in, bond prices rise and the returns in those years can be as high as 20 pc.
L&T NCDs are listed on the NSE and those are another good option for those looking at good quality paper, liquidity and decent returns.
Our asset allocation should not only be equities, but also gold, debt and other asset classes. I am not a big fan of real estate investment other than place where I live simply for the myriad red tapism, difficulty in disposing and the procedural hassles. I prefer assets where I can liquidate and get cash in max 3 days.