Government of India Saving Bonds: Should You Invest?

Jan 11, 2018

The government of India is the safest debtor in the country, isn't it? Usually, when you invest in a government-run scheme, you don't fear losing money. No wonder we are always on the lookout for bond issuances from the RBI/Government.

But sometimes, the interest rates offered thereon are so low that you start wondering whether you should invest or give it a miss. After all, you invest to earn positive tax and inflation-adjusted returns, don't you?

Recently, the Ministry of Finance issued a notification providing information on 7.75% Savings (Taxable) Bonds, 2018 which is open for subscription from January 10, 2018. PersonalFN brings you a detailed analysis of the bond issuance and highlights some crucial points. Read carefully...

Who can invest in bonds?

Individuals and Hindu Undivided Families (HUFs) can invest in bonds. Minors with a guardian-father/mother or any legal guardian-can also invest. Non-Resident Indians (NRIs), and other artificial persons such as partnership firms and companies.

What's the minimum investment amount?

Rs 1,000 is the minimum amount you could invest-i.e. the face value of each bond to be issued. While there is no upper limit on the investments, the bonds can be bought only for the amount in multiples of thousands.

What's the rate of interest?

The government will pay interest at 7.75%. The interest will be paid half-yearly if you opt for the non-cumulative option. The cumulative option will return Rs 1,703 at the maturity for every Rs 1,000 invested.

What's the maturity profile of the bonds?

The bonds have a maturity of seven years. The premature withdrawal is available only to investors with the age of 60 years and above, after they submit documentation for proof of age, such a birth certificate, to the issuing bank.

For investors in the age group of 60 and 70 years, the lock-in period is six years. For those in the age group of 70 and 80, the lock-in period will be five years. Very senior citizens-80 and above-will have to hold bonds for a minimum of four years. If either of the joint holders fulfils the conditions above, the applicable lock period will change as mentioned above. The bonds are neither tradable nor transferable in the secondary market.

Where to get the application forms and submit them?

The issuance will be handled by all nationalised banks including SBI and its associates. Besides, three private banks ICICI Bank, HDFC Bank, and Axis Bank along with Stock Holding Corporation of India will facilitate the bond purchase.

Should you invest in 7.75% Savings (Taxable) Bonds, 2018?

The government has set the interest rate on these bonds slightly higher than other Small Savings Schemes (SSS) such as Public Provident Fund (PPF) and National Savings Certificate (NSC). But given that the inflation is inching up, the bonds may generate lower tax and inflation-adjusted returns for those in the 20% and 30% tax brackets.

Government bonds: Safe but unattractive...

Tax slab	Tax and inflation-adjusted rate of return
10%	2.08%
20%	1.30%
30%	0.53%

(Note: for the purpose of calculation of the tax and inflation-adjusted rate, retail inflation for November 2017i.e. inflation of 4.9% is considered)
(Source: PersonalFN Research)

Bond assessment...

While it's one of the safest options available to conservative investors with low risk tolerance, it may not be the most appropriate one, at least at this juncture. Let's not forget the interest is taxable and it has a long maturity of seven years. If inflation keeps inching up and the RBI decides to raise policy rates, the banks will also hike interest rates on deposits, eventually. Therefore, don't commit all your money to these bonds, even if you want to invest in them for the safety they offer.

What applies to mutual funds, applies to government schemes...

The capital market regulator has been keen to end the "commission-driven" nature of the mutual fund business. It's been advocating mutual fund houses to promote direct plans and educate investors. Why should investors not expect the same from the government?

As the official circular on the bond issuance suggests, the government is going to pay 1% commission to banks for the fund mobilisation. Isn't it too high, considering the vast reach of banks and willingness of the investors to invest in government securities for safety?

If the government is prepared to increase spending, why won't it pay the bond-holders more and pay a proportionately lower commission to banks for the mobilisation of funds? The government has to analyse where it can cut down expenses in the entire process of fund mobilisation.

As far as beating inflation without taking excess risk is concerned, investors can look at debt funds as an alternative. Please note: debt funds are not risk-free. But when chosen carefully, they can generate higher tax and inflation-adjusted returns vis-a-vis those generated by the "secured bonds".

A sensible and astute investment strategy serves the path to wealth creation and it is beneficial to your long-term financial well-being.

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This article first appeared on PersonalFN here.

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