IDFC Infrabond : Good investments!!!

The Industrial Finance Corp of India (IFCI) had launched these bonds sometime back. Now, Infrastructure Development Finance Co (IDFC) has also launched these bonds. The issue opens for subscription on Thursday, September 30, and closes on Monday, October 18. Investors will need to have a demat account and a permanent account number (PAN).

About the issue
IDFC is looking to raise up to `3,400 crore this financial year. The bonds come with a maturity of 10 years, and a lock-in of five. They will be issued in 4 different series:

> Series 1 pays bondholders an interest of 8%, which is payable annually
> Series 2 pays an interest of 8% as well, but the interest will keep getting reinvested into
the bond
> Series 3 pays 7.5% interest annually, but comes with a buyback option
> Series 4 pays 7.50% interest which gets reinvested into
the bond, and comes with a buyback option
Investors cannot shift from one series to another once the amount is paid. However, one can invest in all four series by paying `5,000 in every series.

The real return
What is interesting is that even though the interest paid on these bonds are in the range of 7.5-8%, the actual return works out to be much greater, once you factor in the tax deduction. The initial investment into the bond saves tax. And since a rupee saved is a rupee earned, paying lesser tax is similar to having invested lesser to start with.

For example, let us say you fall into the top tax bracket of 30.9%
and invest `20,000 in these bonds. This means your tax outgo will be lower by `6,180 (30.9% of `20,000), which in turn means that you will be receiving an interest of `1,600 per year (8% of `20,000) on an investment of `13,820 (`20,000 - `6,180).

This in turn pushes up real return, which, as can be seen from the accompanying table, can be as high as 15.74% in case of Series 4 bonds for those falling in the top tax bracket.

Maturity & lock-in
The maturity of the bonds is 10 years. The lock-in period,
however, is limited to five years. The bonds will be tradable on
the Bombay Stock Exchange and the National Stock Exchange after the lock-in period expires. Series 3 and 4 come with the buyback option which allows the company to buy back the bond from investors once the lock-in period is over.

Is your money safe?
Rating agency Icra has given the IDFC bonds an LAAA
rating, which is the highest rating that an infra bond can get. Over and above this, the Government of India owns 20.08% in the company.

Conclusion
These bonds make for a great investment once you have exhausted your Section 80C limit of `1 lakh.

Remember, however, that you can invest more than `20,000 in these bonds, but you can claim tax deduction on a maximum of `20,000.

IDFC Infrabond : Good investments!!!

Series 1 2 3 4 Face Value Rs 5000 per bond Minimum number of Bonds per application Two Bonds and in multiples of one Bond thereafter. For the purpose of fulfilling the requirement of minimum subscription of two Bonds, an Applicant may choose to apply for two Bonds of the same series or two Bonds across different series. Terms of Payment Full amount with the Application Form Interest payment Annual Cumulative Annual Cumulative Interest Rate 8.00% p.a. N.A. 7.50% p.a. N.A. Maturity Amount per Bond Rs. 5,000 Rs. 10,800 Rs. 5,000 Rs. 10,310 Maturity 10 years from the Deemed Date of Allotment Yield on Maturity 8.0% 8.0% compounded annually 7.50% 7.50% compounded annually Buyback Facility N.A. N.A. YES YES Yield on Buyback N.A. N.A. 7.50% 7.50% compounded annually Buyback Amount N.A. N.A. Rs. 5,000 per Bond Rs. 7,180 per Bond Buyback Date N.A. N.A. Date falling five years and one day from the Deemed Date of Allotment Date falling five years and one day from the Deemed Date of Allotment Buyback Intimation Period

N.A. N.A. The period beginning not before nine months prior to the Buyback Date and ending not later than six months prior to the Buyback Date The period beginning not before nine months prior to the Buyback Date and ending not later than six months prior to the Buyback Date