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Fixed Income

L&T Infra Bonds – Upto Nov 15

On the lines of the IFCI Infra Bonds , Larsen and Toubro have Infra bonds out for subscription too, which save you tax upto 20,000 per year. This is separate from the 100,000 limit on 80C investments. (Technically, it’s the 80CCF deduction, if you want to search and read more)

Details: (http://www.ltinfrabond.com/)

  • Rs. 1,000 per bond. Min: Rs. 5,000 invested.
  • Interest: Annual payout, or reinvested.
  • Maturity: 10 years
  • Interest rate: (A) 7.5% to (B) 7.75%.
  • Closes on Nov 15, 2010
  • Buyback: (A) option has a 7 year buyback option, and the (B) bond, 5 year.
  • Lock-in: 5 years. Post that, traded on stock exchanges.
  • Where can you buy? Download form online, fill it and put in a cheque, and deposit it at the collection centers.

You’ll only get 20K per year on this, by the way, so if you’ve already invested in the IFCI bonds this is not available to you.

The interest is taxable. If you invest Rs. 20,000, and you’re in the 30.9% tax bracket, you save 6,180 in taxes, meaning you’ve invested 13,820. On the cumulative 7.75% option you make Rs. 42,200 in 10 years, but you would have paid about Rs. 6,850 in taxes, so your net return is 35,350. That is not too shabby really – about 9.84% as yield.

Of course the actual amount isn’t all that great – nets you around 1,000 per year as interest, and that doesn’t go too far for the person in the 30.9% interest bracket.

Buyback: L&T Infra can buy the bonds back in 5 or 7 years, but you can’t ask them too. Effectively it’s a call option they have. The yield then increases substantially – net of taxes (saved and paid on the interest), the yield on the 7.75% 7 year cumulative bonds goes to 11.44%. (Don’t bother with what the prospectus says – they don’t cut the amount you pay in taxes on the interest)

In comparison the net tax yield of an 8% Fixed deposit for the highest tax bracket investor is about 5.6%. So this is very nice. Only pain is that amounts are tiny. Will I invest? I don’t know yet. The yield is nice, but will there be better yields coming along? Are stock markets simply better, regardless? Very undecided. Also the debt equity ratio is scary – L&T infra has 340 cr. in debt till now and they’re absorbing 700 cr. in this issue; perhaps I shouldn’t be worried, after all, everything is too big to fail now.

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  • purplepatch says:

    >Hi Deepak,

    Thank you for your posts here and at Yahoo. Appreciate all the effort you put in and the insights you provide. Please keep up the great work.

    A question for you – Is there an active secondary market for corporate bonds? I'm not keen to go for FDs or mutual funds. I've seen some info on the NSE and BSE sites for the Retail Debt Market but volume and depth seem completely absent (hence assuming they are merely show ponies for these exchanges).

    Would apreciate any info you can provide.

    Regards
    Hiten