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Your money: Why bonds are better than FDs

Tinesh Bhasin in Mumbai | March 19, 2009 12:18 IST

Government-backed bonds have traditionally attracted conservative investors. But fixed deposits took the sheen away from them last year after banks offered between 10 and 11 per cent yields. However, with fixed deposit rates coming down, the trend seems to be reversing.

India Infrastructure Finance Company, for instance, is targeting retail investors for a Rs 2,600 crore (Rs 26 billion) issue. Here's a look at the ongoing bonds issues that retail investors can participate in:

IIFCL's tax-free bonds

Targeted at high networth individuals, the face value of this bond is Rs 100,000, with the minimum application size being 10 bonds. These five-year bonds are tax-free with an annual interest rate of 6.85 per cent. The issue closes on March 19. Considering the post-tax returns, these bonds give the highest returns of 6.85 per cent for investors with income over Rs 3 lakh (Rs 300,000).

Bhavishya nirman bond

The National Bank for Agriculture and Rural Development has been advertising a yield of 11.57 per cent based on simple returns for these bonds. The actual compounded return is 8.62 per cent only. If you invest Rs 8,750 (the price of each bond) in Bhavishya nirman bonds, you will receive Rs 20,000 on maturity after 10 years. These bonds offer better returns than banks' fixed deposits, though the interest is compounded once in a year. BNB also offers tax deduction under Section 80C.

"Before investing in these bonds, one should be prepared for the lock-in period of 10 years. These bonds can form a part of the corpus that someone is saving for the long-term, such as a child's education," said an investment adviser.

For investors in the income bracket of Rs 3-5 lakh (Rs 300,000-500,000) and for those who cannot invest in the IIFCL issue, these bonds give the highest post-tax returns of 6.62 per cent. This is also the best investment option for low income slab individuals with post-tax returns at 7.62 per cent.

Rural bonds

Another offering from Nabard, rural bonds have interest rate at par with banks' fixed deposits. The yields are 8.5 per cent with a lock-in of five years. Targeted at small investors, the face value of the bond is kept at Rs 1,000 and the minimum investment is Rs 5,000. Nabard also offers 0.5 per cent more interest to senior citizens.

So, if you are an investor with income below Rs 5 lakh (Rs 500,000) and need liquidity, this one is for you. The rural bonds will fetch 7.5 per cent return for investors with an income below Rs 3 lakh (Rs 300,000), and 6.5 per cent for investors with income between Rs 3-Rs 5 lakh (Rs 300,000-500,000).

Government savings bonds

According to the risk grade, this is the safest investment available. Backed by either the state or the central government, the savings bonds offer 8 per cent returns with a lock-in for six years. The minimum investment is Rs 1,000. The interest is paid on a half-yearly basis.

Capital gains bonds

These bonds help to save capital gains tax arising out of the sale of an asset. For example, if a person sells his house, the profit from the sale is taxed. So, the seller can invest in these bonds and reduce tax liability.

The investment tenure is three years and the returns are 6.25 per cent. The minimum investment in capital gains bonds is Rs 50,000. The investor needs to buy a minimum five bonds costing Rs 10,000 each. The maximum investment is capped at Rs 50 lakh (Rs 5 million).

Rural Electrification Corporation and National Highways Authority of India are currently issuing capital gains bonds. The issue will close on March 31. Don't use it for investment purposes, unless you need to save capital gains from the sale of an asset. The returns are as low as 3.25 per cent for those in the highest tax bracket, and 5.25 for the lowest one.

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