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Should you invest in Bhavishya Nirman Bonds?
Personalfn.com | November 21, 2007 11:04 IST
Assured return schemes tend to account for a significant share of an investor's portfolio. As the name suggests, these schemes offer assured returns i.e. investors know upfront how much return they are going to earn from their investments. Therefore, there is less uncertainty i.e. lower risk associated with investing in such schemes. Notwithstanding the benefits offered by these schemes, not all assured return schemes make worthy investments.
Recently, the National Bank of Agriculture and Rural Development launched its new issue of Bhavishya Nirman Bonds. These bonds are essentially zero-coupon bonds. At Personalfn, we have received several queries from investors enquiring about whether these bonds are worth investing in. This article aims at answering these queries.
Before venturing into what these bonds offer investors, let us first understand what zero coupon bonds are all about.
What BNB offers?
The current issue price of each bond is Rs 8,250 and the face value is Rs 20,000. Investors should note that the face value of the bond is actually the maturity value and not the buying price, as is the case with other investment avenues. For investors, this means that they will be issued the bond at Rs 8,250 and after 10 years they will receive Rs 20,000 for each bond they own. The difference of Rs 11,750 is effectively the return on their investments.
These bonds can be held in both physical as well as in dematerialised (demat) form. However, investors who wish to trade in these bonds once they are listed at the exchange, should compulsorily have them in demat form. Remember that on the stock exchange, depending on the prevailing interest rate, these bonds could trade at a premium or discount.
How much return do they offer?
The advertised return is only the simple annualised return, which is not the conventional way to calculate returns i.e. it is nothing more than a clever marketing strategy to attract investors. The conventional parameter is compounded annualised growth rate (CAGR), which for the BNB is not very impressive. Moreover, the CAGR of 9.26 per cent, projected by NABARD, does not give the exact picture to investors. Let us understand this with the help of an example.
NABARD's projected CAGR
Personalfn's projected scenario
(We have taken a 10 per cent capital gains tax plus surcharge (10 per cent) and education cess (3 per cent),
as opposed to the 20 per cent capital gains tax with indexation benefit.)
As can be seen in the table, after accounting for capital gains tax, the returns that investors will receive after 10 years will be Rs 18,669 and not Rs 20,000. Consequently the rate of return will be 8.51 per cent CAGR and not 9.26 per cent CAGR as represented by NABARD.
What should investors do?
So, if you have no need for liquidity and have a very low risk appetite, then you may want to consider investing in this bond. But, do not put in all your money. Alternative avenues like Fixed Maturity Plans, though not as safe, but not high risk either, could offer you better tax-adjusted returns from time to time (for instance in March 2008, if liquidity does dry out like has been happening for a couple of years now, you could lock in your money at very attractive yields).
However, if you have appetite for volatile returns then consider Monthly Income Plans (MIP) from mutual funds. These plans could, over a period of time, generate double-digit returns. The downside -- since neither the return nor the capital is assured, you stand a chance to lose money. In our view, a well-managed MIP could however deliver attractive risk-adjusted returns.
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