infrastructure bonds

The following is a guest post from reader Nikhil Shah and deals with the intricacies of investing in the soon to close investment opportunity in L&T’s Infrastructure Bond issue along with the income tax angle. Earlier this year, Nikhil had also put-up a detailed analysis of the previous L&T bond issue.

Dear All,

The year is coming to an end and it’s time to plan and invest for saving your income tax. Apart from your regular tax saving instruments eligible for deductions of up to Rs 1 lakh, there are long-term infrastructure bonds in the market. These infrastructure bonds are debt instruments wherein an investment up to Rs 20,000 is eligible for individual income tax benefits under section 80CCF.

The yields on Government Securities have been on a downturn in the recent past. Currently the 10 year G-sec is trading at around 8.31% which is 57 bps (basis points) lower than the October closing which was 8.88%. In other words, INFLATION is going down.

So you are requested to please grab this wonderful opportunity and invest in L&T Infra Bond issue which is currently running and closes on 24-Dec-2011. I’ve also created an investment analysis calculator which you can download from the link below.

Link:

Click to download a detailed analysis of L & T Infra Bonds.

Regards,

Nikhil Shah

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Asked and Answered: February, 2011

by Vinaya HS on February 25, 2011

in Finance

Here’s what was asked and answered by Capital Advisor in February, 2011. If you have a question on managing your personal finances, send me an email and I’ll respond at the earliest. If your question’s beneficial to a wider audience, I’ll publish it in a future edition of “Asked and Answered,” without revealing your personal details.



Query #1: On continuing a guaranteed-return life insurance policy.

I have a question regarding my TATA AIG Maha Life Gold life insurance policy. For a sum assured of Rs 400,000, I am paying Rs 35,000 as annual premium for 10 years. After the 6th year, which is this year, the policy gives me a small cash dividend of around 2%. After the 10th year, a guaranteed annual coupon of 5% that is Rs 20,000 would be paid to me. I am not sure if its good to discontinue this policy at this point of time. Please suggest.

I ran the numbers on this situation — you can download my analysis here — and the results were quite shocking. (Note: The sheet doesn’t consider the paltry cash dividend. Even if it did, the results would still be shocking.) And as I told the reader, “if you play around with the Excel sheet, you’ll find that all TATA AIG needs to do is park your money in a FD and they’d still make money off you! But since you’re already in the 6th year (and I don’t find a surrender option), I guess you have no choice but to continue this policy.”

I then ran the numbers on a similar policy from Bharti AXA called Bharti AXA Aajeevan Anand — you can download my analysis here — and the results were equally shocking.

I’d stay away from such policies. In my opinion, the minimum guaranteed coupon should be equal to the current risk-free rate of return, but then that wouldn’t make business sense to the life insurance company, would it?

Just put those premiums in a Fixed Deposit and you’d do far far better.



Query #2: On the New Pension Scheme.

Could you review the New Pension Scheme (NPS)? I want to invest in a Pension Plan without being taken for a ride.

In my opinion, most Pension Plans, these days, take you for a ride — so much so that sometimes I wonder who the pension is for: you or the insurance company.

While I have a general sense of the NPS, I’m not intimately familiar with its structure and working. Therefore, I pointed the reader to a recent article on NPS in ET Wealth for further information.

Personally, though, when it comes to financial instruments, the NPS isn’t on my radar.



Query #3: On infrastructure bonds.

Have you analyzed the Infrastructure Bonds from IDFC and L&T?

I haven’t. But reader Nikhil Shah was kind enough to share his detailed analysis of these infrastructure bonds some time back.

(Note: Follow me on Twitter, and you’ll have advance access to these downloads.)

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Going purely by the numbers I recently highlighted, both D and I ought to put our money into these infrastructure bonds.

But, in my case, I don’t want to invest my money just for the purpose of lowering my income tax. I’d rather pay a marginally higher income tax, improve my cash flow, and invest in line with my ongoing objectives.

In D’s case, she’s OK with investing her money if it can help lower her income tax. ,but she doesn’t have the mandatory Demat account at the moment. As CFO, I’ll let this opportunity pass since more such issues are expected in the pipeline. Since the bonds can now be subscribed to in physical format too, I will get this done for her in the coming week.

That about sums up what we’re doing. How about you?

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Here’s what I suggest. Ignore all those complicated analysis (an example) of yields and returns and comparisons with other fixed-return financial products. Buy these bonds if and only if:

  • Your objective is to lower your income tax, and

  • You fall in one of the highlighted cells below.

IDFC_Bond_Analysis

In such a case, opt for the Series – 4 option. Else, don’t bother. Put your money to better use — get started on that emergency fund or make an extra payment against your loan’s principal.

Contrarian to what everyone else’s saying?

Note: Published this post ahead of its schedule given the issue closing date.

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