ICICI Safety Bonds: A reality check

The ICICI Safety Bonds issue opened on August 28, 2000. The issue has been sub-divided into 3 schemes. They are:

• Tax Savings Bond, in which the investor gets the added benefit u/s 88 or u/s 54EA of the Income Tax Act. The scheme has been further segregated into 2 types viz. Annual Interest scheme and the Deep Discount Bond (DDB) scheme.

Under the interest option, the investor gets an annual interest at the rate of 10.5% for three years, but the bond gets redeemed at face value (i.e. at the same value). The total absolute realisation from this scheme for both the options i.e. u/s 88 or u/s 54EA, works out to be Rs 6,575 at the end of 3 years.

Tax Savings Bond

	Section 88 benefit		Section 54EA benefit
	Annual Interest	DDB	Annual Interest	DDB
Issue price (Rs)	5,000	5,000	5,000	5,000
Face Value* (Rs)	5,000	7,000	5,000	7,000
Redemption period	3 yrs	3 yrs 4 mths	3 yrs	3 yrs 4 mths
Interest (%) (p.a.)	10.5	-	10.5	-
Annual interest (Rs)	525	-	525	-
Total amount received	6,575	7,000	6,575	7,000

*Face value means value of the bond on redemption

Under the DDB scheme, the investor doesn't get any interest, but at the end of 3 years and 4 months, the investor realises Rs 7,000. At the first look the DDB option looks more attractive compared to the annual interest option. But if we were to convert the interest option realisations for 3 years and 4 months (the same as DDB), realisation would become Rs 6,750 for annual interest investor. The absolute difference between the two options is hence, only Rs 250. But please note that under the annual interest option, the investor gets an annual interest of Rs 525 at the end of first year itself, Rs 525 again at the end of two and three years.

If the investor decides to again reinvest this Rs 525 for the remaining 2 years and 4 months even at 8% current bank rate, he gets Rs 103.69 as interest at the end of it. The next annual interest of Rs 525 in second year, if invested for the remaining 1 year 4 months, will give an added Rs 57.12 to the investor. Hence under the annual interest option the investor can actually realise = 6,750+103.69+57.12 = Rs 6,911. So in effect, the difference is not really too much in between both options.

• Regular Income Bond, under which if the investor invests Rs 5,000 for 4 years, he will still get Rs 5,000 at the end of it, but added to that he will also get interest. The scheme is similar in nature to the annual option under the tax savings bond but here the investor can choose from monthly, quarterly and annual interest options. The yields are more or less similar under all these 3 options.

Regular Income Bond

	Monthly interest	Quarterly interest	Annual interest
Issue price (Rs)	5,000	5,000	5,000
Face Value* (Rs)	5,000	5,000	5,000
Minimum application	3 bonds	2 bonds	1 bond
Minimum application (Rs)	3*5000=15,000	2*5000=10,000	5,000
Redemption period	4 yrs	4 yrs	4 yrs
Interest (%) (p.a.)	10.4	10.7	11.0
Yield to investor	10.9	11.0	11.0

*Face value means value of the bond on redemption

• Money Multiplier Bond is in the nature of a deep discount bond, where no interest or regular income accrues to the investor, but he gets the benefit of capital appreciation at the end of his or her maturity tenure.

Money Multiplier Bond

	Double	Triple	Five times	Ten times
Issue price (Rs)	5,000	5,000	5,000	5,000
Face Value* (Rs)	10,000	15,000	25,000	50,000
Minimum application	1 bond	1 bond	1 bond	1 bond
Minimum application in Rs	5,000	5,000	5,000	5,000
Redemption period	78 mths	123 mths	180 mths	255 mths
Yield to investor	11.3	11.3	11.3	11.4

*Face value means value of the bond on redemption

In this, one can invest Rs 5,000 for 78 months and double his money, or he can wait for 123 months to triple his money, or for 180 months to see his investments grow five fold. If one waits for 255 months (i.e. 21 years and 3 months) then your investments grow ten fold to Rs 50,000. The yields for all the four options are more or less same.

So, which option you as an investor take? Well, it frankly depends on your investment outlook and also on your liquidity needs. If you are looking for capital appreciation, you can either go in for the Money Multiplier Bond or the DDB scheme under Tax Savings Bond. But if you are looking for regular incomes you can either choose the annual option under Tax Savings Bond or the Regular Income Bond.

It is important to note that the Tax Savings Bonds (either DDB or annual interest) also double up as tax savings instruments. So in effect, the yields are higher in Tax Savings Bond scheme.