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How good are the UTI bonds?
Rakesh P Sharma | August 26, 2003 12:15 IST
Investors' of Unit Scheme-64 (US-64) opting for the bond option have much to cheer as these bonds continue to trade at a much higher than offer price in the secondary markets.
However, volumes continue to remain a concern for big institutional investors yet to start trading actively in these bonds.
On the National Stock Exchange, these bonds are currently trading in the range (face value of Rs 100) of Rs 105.91-106.40. These bonds are also traded on the Bombay Stock Exchange and OTCEI.
These 5-year bonds have a 6.75 per cent coupon, payable half-yearly. The government has guaranteed the interest and principal at maturity on these bonds.
For those investors, who had opted for the bond option, the number of bonds have been issued in proportion to the value and number of US-64 units held as on May 31, 2003.
For instance, if an investor holds 12,000 units, the first 5,000 units covered have been converted at Rs 12 per unit. The balance 7,000 units were converted at Rs 10. Thus, an investor will have been issued 1,300 bonds.
Should one remain invested?
Now, we examine whether one should remain invested in these bonds or accumulate these bonds at the current levels. At current market price of Rs 105.91, the yield-to-maturity on these bonds is 6.37 per cent.
Thus, there is no case for fresh investment in these bonds in the current market. It makes sense to buy UTI bonds only if you think liquidity is more important than returns.
However, tax-paying existing individual investors, especially in the 30 per cent tax bracket, are in an enviable position. The 6.75 per cent tax-free US-64 bonds already offer above market yields.
In addition, they now have the chance of selling these units for a higher price and re-investing them in the 6.5 per cent tax-free government bonds.
This makes sense if you can neutralise the capital gains on the UTI bonds against losses from other shares/securities. Otherwise it is better to stay invested in UTI bonds.
In case, high tax bracket individual wishes to continue, it is not a bad option too.
Currently, five-year State Bank of India term deposits fetch 6 per cent interest and the yield on five-year government securities is hovering around 5.25 per cent.
No other bond will fetch you such a high return. Thus, US-64 bonds continue to remain beneficial for high income-tax payers as the effective return for them works out to around 9.60 per cent.
In other words, this is an attractive rate of interest for investors given that there are few administered rate instruments existing at that coupon rate right now.
Further, like RBI Relief Bond, US-64 units will also be eligible as collateral for loan and transferable.
But non-tax paying investors, who had opted for the bonds, will be better off if they sell the bonds as they will be getting a better price.
They can invest the proceeds in the public provident fund (if they have a long-term horizon), PO schemes, debt market mutual funds or even the eight per cent RBI savings bonds.