L&T has come up with the second tranche of their infrastructure bonds, and this will be open from the 7th Feb 2011 to the 7th March 2011.
The bonds are issued under section 80CCF so they will get you an additional tax relief in the form of reduction of taxable salary outside of what you get under Section 80C.
L&T Infra bonds have been rated CARE AA+ by CARE which denotes low credit risk. The bonds can be purchased in the physical or Demat form, and the minimum investment needed in the bond is Rs. 5,000.
There are two series on offer by L&T and the maturity period of both the series is 10 years. However, there is a buyback option that can be exercised by you at the end of either 5 or 7 years.
Here are some details about this issue.
L&T Infrastructure Bonds
As you can see above the series which pays annual interest rate has a slightly lower interest payment at 8.20% when compared with the series that pays out cumulative interest. Personally, in the high interest scenario we are in I’d go for the slightly lower interest rate for getting an annual payout, but that’s just my preference.
You can invest in these bonds through your trading accounts like ICICI Direct, through financial advisers, or you could do it directly by filling out a form, and submitting it in one of the collection centers.
IIFCL is also offering infrastructure bonds under section 80CCF, and their issue started on the 4th February and will close on the 4th of March.
IIFCL Infrastructure bonds have a face value of Rs. 1,000 and the minimum investment needed in them is Rs. 5,000. The bonds can be issued in both physical and Demat format, and the issue has been rated AAA / Stable by CRISIL and CARE AAA by CARE, which indicates their highest safety rating.
These are secured bonds, and have a lock in period of 5 years after which they will be listed on the BSE.
No TDS will be deducted on bonds on Demat form, and for the bonds in paper form no TDS will be deducted if the interest is less than Rs. 2,500.
Here are some details of the IIFCL Infrastructure bonds.
IIFCL Infrastructure Bonds
As you can see from the above table there are 4 series, and every series has the buyback option on it as well. The buyback means that even though the maturity period of the bond may be 10 or 15 years, you can get your principal back earlier than that.
In series 1 and 2 – you can ask the company to buyback these bonds after 5 years whereas if you opt for series 3 or 4Â – you can ask the company to buyback the bonds after 7 years.
Since the main benefit of these 80CCF bonds is tax saving, I’m of the opinion that the series with the shorter tenure makes more sense, but this is ultimately your decision and you have to see what makes most sense for your finances.
One more thing I’d like to emphasize is that these 80CCF bonds are all under the cumulative limit of Rs. 20,000. If you have already invested in some other infrastructure bond then there is no point in investing in this again since you won’t get the additional tax saving.
Reader D.D. Kandpal sent me this incredible LTA tip, which I hadn’t heard or read anywhere, and I thought I’d share it on a post of it’s own.
Please note that these provisions are for those who join Government service only.
Rule 8 Type of LTC
“ Fresh recruits to Central Government may be are allowed to travel to their home town along with their families on three occasions in a block of four years and to any place in India on the fourth occasion. This facility shall be available to the Government officers only for the first two blocks of four years applicable after joining the Government for the first time. The blocks of 4 years shall apply with reference to the initial date of joining the Government even though the employee changes the job within Government subsequently. The existing blocks will remain the same but the entitlements of the new recruit will be different in the first eight years of service.â€
Ref  O.M.  NO. F.No. 31011/4/2008-Estt. (A)  dated 23rd September, 2008 issued by Government of India, Ministry of Personnel, Public Grievances & Pension, Department of Personnel & Training .
Thank you to Mr. Kandpal for sending this along, and my apologies for publishing this so late.
One of the things that amazed me most about the Egypt uprising was that they shut down the internet. They just shut it off. I couldn’t believe that was possible but the Egyptian government just did it!
Then I was even more amazed to learn that the people actually favor the military, and that the military is going to try and steer the country towards democracy. They can get absolute control, but they will do what’s good for their country – I sure hope it happens.
But the thing that I find most amazing is how it all started in Tunisia with one frustrated young man burning himself alive, and how quickly it has spread to other countries with no one able to predict what is going to happen.
Here is a very good piece from the Economist titled The Autumn of Patriarchs which gives a very good account of what happened in Egypt.
Bahrain is engulfed in a lot of tension right now, and this NYT article provides a very good account on what’s going on there right now, and how the military is firing on its own people. The situation there is improving though, and today’s NYT has accounts of the army pulling back.
Bahrain is not alone in its strife though; this brief Reuters article reports grim news from Libya.
Closer to home, here is John Elliot’s excellent piece on the rare press conference by Dr. Manmohan Singh.
I guess people everywhere are tired of their governments and weirdest example of this that I’ve come across in a while is in Brazil where a clown has won the election, and that too with a landslide!
His election slogan was “It can’t get any worse” and he planned to do nothing more than report how other politicians spent their time!
Just so that I have one link relevant to the topics I usually discuss here I’m going to share Hemant Beniwal’s piece on the Reliance Gold Mutual Fund – this piece has great info on the mutual fund, and more than that it has got a lot of insight on why you’re mostly on your own when it comes to managing your finances.
Oh, and I almost forgot to congratulate the Indian team for their first win of the world cup. Sreesanth was the only real hope Bangladesh had after India made 370, but luckily he didn’t get to bowl his full quota today.
Rahul just left a comment answering another reader about the best fixed deposit interest rate available for senior citizens right now.
I was certainly not aware of this, and at 10.5% for 8 years – Canara Bank is offering the best interest rate to senior citizens right now.
Some other banks that offer high interest rates are Axis Bank, IDBI and Tamil Nadu Mercantile Bank – all of them offer 10% to senior citizens for varying durations.
If you know of anything better then please leave a comment and I’ll update the post, and here is my earlier post about banks with high interest rates on their fixed deposits.
Kapil left a comment informing everyone that  Edelweiss Brokerage is offering an opportunity to its account holders to apply for the SBI bonds online, and I thought it was a useful enough piece of information to be shared in a full post of its own.
Applying online is far more convenient than hunting for a bank branch because other readers have emailed to tell me that not every SBI branch has the forms, and some SBI employees don’t even know about the issue, and aren’t even able to point to where someone might get a form.
I haven’t come across a list of branches that will be have these application forms, so if you know of any then please leave a comment as a lot of folks are looking for that info.
Now on to something totally different.
TDS on SBI Bonds
Shiv shared another bit of useful information about TDS being applicable on the SBI bonds if the interest earned is more than Rs. 10,000.
I was not sure about this aspect because it was my understanding that TDS is not applicable to bonds issued only in Dematerialized form, but the prospectus does talk about TDS, so I wasn’t sure how this was going to work out.
Matters related to taxation always leave me scratching my head.
Any input you have on other brokerages allowing their customers to apply for the SBI bonds online, or about where one could get a form even if it is just one branch that you know about is much appreciated. Please leave a comment, and someone else might benefit from your knowledge.
Reliance gold mutual fund is a fund of funds, which means it is a mutual fund that invests in other funds. The first thing that should come to your mind when you hear the word – fund of funds is double expenses.
You will have to pay the expenses of the fund first, and then the fund in which the original fund invests indirectly. Because of this you should have some really good reasons to invest in a fund of funds, and in general you should try to avoid them.
I say in general because there are times when you might find a good reason to invest in a fund of funds, and there was one such instance last year – that too with a gold fund of funds.
I had written about Quantum Gold Savings fund last March, which was also a fund of funds, and which would have primarily invested in Quantum gold ETFs.
The interesting thing about it was that the expenses of the mutual fund would be borne by the sponsor, so there would be no double expenses for investors.
My guess is that they did it because in their view people were still getting used to the idea of ETFs, and if they created an instrument in the form of a mutual fund which tracked gold by investing in gold ETFs – they could overcome that fear, and give a boost to their gold ETF as a result of that.
This is of course just a guess – I’ve never spoken to anyone from Quantum, and I really don’t think they will entertain small bloggers like me in idle banter.
Now this gives a possible reason on why Quantum would want to issue such a fund, but why would any knowledgeable investor be interested in investing in such a fund?
Vinod Lalwaney answered the question by saying it will help him create a SIP in gold, which is not an option available while investing in gold ETFs directly.
That made sense at the time given the zero expenses of the Quantum fund, and lack of ETF SIP options, but Reliance gold mutual fund is different as it does charge you expenses, so you will be charged double expenses, and there are now ways in which you can set up a SIP in ETF though they may not be as direct as setting up a SIP in a mutual fund.
In my opinion anyone who plans to invest in gold ETFs and is looking at an amount greater than the value of one unit of Benchmark ETF should go for it, as I’ve stated earlier that it’s the most liquid and low cost gold ETF available at the moment.
That being said, I can certainly see the utility of Reliance Mutual Fund for someone who doesn’t have a Demat account or who has a Demat account but wants to do a SIP in gold ETF with a small sum.
One last thing about the Reliance Gold Mutual fund is that it has an exit load of 2% if you exit the fund within a year, so you will lose 2% of your money if you sell within a year.
Those are my thoughts on this NFO – as always feel free to add your own thoughts, and ask any questions.
This time we’re going to cover the recently announced SBI retail bonds, and if last time was any indication these will become hot as hell when they open for subscription.
For this post I’m going to cover the features of these SBI Retail bonds, and then answer some questions leveraging what people asked last time around.
SBI Retail Bonds
SBI Retail Bonds: Open and Close Date
I think only the open date is important in this issue because last time around the issue got over-subscribed the first day itself, and it’s quite likely that it gets over-subscribed this time again.
The open date for Tranche 1 is February 21, 2011 and close date is February 28 2011.
If you decide to buy these bonds, then I’d highly recommend doing so on February 21st itself. If you’re not able to buy them on February 21st then make sure to check how much they have been over-subscribed by since these SBI bonds are on first come first serve basis, and there might be no point in applying for them after the 21st.
Interest Rate on the SBI Retail Bonds
For retail investors these bonds will pay out 9.75% for the 10 years series, and 9.95% for the 15 years series.
10 years
15 years
9.75%
9.95%
There are banks that give you 10% for fixed deposits, but none of them allow you to lock in to that rate for this long a period. In that sense – these SBI bonds are offering quite a good deal compared to whatever is available at present.
I say at present because that’s important. When SBI came out with their retail bond issue last time around – there was a huge demand for that and it was a pretty sweet deal too. But, that was at a lower rate than the current offering, so you don’t know how interest rates are going to look like 5 years from now or 10 years from now.
Your money does get locked in with the SBI bonds since this is not like a fixed deposit that you can break at your will. If you go for the 10 years tenure then it will be redeemed at the end of 10 years.
SBI has the option of redeeming them at the end of 5 years and 10 years as well (more on that later), but they will only do so if the interest rates are lower at that point in time, so in that sense – keep in mind that you are committing to the redemption time period.
SBI Bonds will list on the stock exchange
These bonds are going to list on the stock exchange so you will have the option to sell them in the secondary market even if you can’t redeem them.
Keep in mind though that bond prices move about in the secondary market, so this is not the same as redemption because the prices will depend on the demand and supply plus the interest rates at that time.
Minimum and Maximum Application
The face value of one bond is Rs. 10,000 and that’s the minimum investment for the retail investor. The maximum application amount for the retail investor is Rs. 500,000.
Compulsorily in Dematerialized form
These bonds will not be issued in physical form, so you will need a demat account in order to apply for these bonds. Since this is a short point I’ll add that for the 3 of you who care these are unsecured bonds, but are rated AAA by CRISIL.
Can I get loans against these SBI Retail bonds?
No, you won’t be able to pledge these bonds like fixed deposits, and get loans against them. Similarly, you can’t break them before time like I said earlier.
Can NRIs apply for these bonds?
No, NRIs are not allowed to apply for these bonds.
When will the bonds start trading in the stock exchange?
You won’t have to wait for a long time for the SBI bonds to start trading on the stock exchange. If last time was any indication then the trading will start in less than a month of allotment.
What kind of listing gains can I expect?
I wish I knew because then I could make money without doing any real work, but alas that’s not to be. I’m sure there is going to be a lot of speculation around this, and the only input I can provide is that last time around the SBI retail bonds listed at a 5% premium.
Can I apply for the SBI bonds online?
No, there’s no option of applying for these bonds online – you have to necessarily apply using the physical form.
Is the interest from these bonds tax free?
I’ve had at least a couple of questions last time on this, and I think somehow the fact that the bonds are listed makes some people think that the interest is tax free or that there is no capital gains tax on it. This however, is not true – the interest is taxable, and if you make any capital gains selling the bonds then that’s liable to tax as well.
Where can I buy the SBI bonds from?
You can get the application form in a bank branch, and then fill it and submit it there. Someone told me last time that it helped to go to the bank before hand and get the forms and fill it because of the rush later on. I don’t know how true this will be for everyone, but sounds like a good idea.
What does the call option mean?
There is a call option with this bond which means that for the bond with 10 years tenure SBI has the option to redeem it after 5 years if they want to, and for the bonds with a 15 year tenure SBI has an option of redeeming it in 10 years if they want to.
Remember, this is their option – not yours. They will exercise it if they see it fit, but you can’t ask for buyback after 5 years if you want. In that sense this is different from the infrastructure bonds, which are the other bonds currently selling in the market.
I’ve tried to answer all questions I could think of, and have kept the post as simple as possible. Please feel free to ask any question that I have left out, and I’ll try to answer them, and of course there are a lot of other smart readers who answer questions these days, so you may not even need me.
Ravi V has shared this link where you can enter your IFCI infrastructure bond application number and see the allotment status. Karvy before that had come up with a link where you could download your IDFC allotment advice as well, but you can’t do that here yet.
Still, this is going to be useful for a lot of people who haven’t got any communication on their IFCI infra bonds.
There are several gold ETFs in India, and with the exception of Quantum – 1 unit of every gold ETF represents 1 gram of gold. If that’s the case then why does the price of these gold ETFs differ?
Shouldn’t they be exactly the same?
No, they shouldn’t, and before you get to the reasons why they shouldn’t – it’s important to understand that the last traded price of an ETF is not the same as its NAV.
Don’t compare the last traded price of one ETF to another
A gold ETF owns the following assets:
Gold
Debt and other liquid instruments
Cash
The combined value of these assets divided by the number of units in the gold ETF constitute the NAV of the ETF.
The NAV of a gold ETF can be seen on its website, so you can see that the Benchmark gold ETF GOLDBEES had a NAV of 1975.26 on 13th December from their website.
However, since an ETF trades in the stock exchange and there is a different price at every tick the price of the ETF can be different from its NAV. The NSE website shows that the last traded price on that day for GOLDBEES was Rs. 1965.25.
This means that the ETF was going at a discount of about Rs. 10 at that point. There are big market participants who are engaged in actively trading the ETF to bring the market price closer to the NAV and gain from any arbitrage opportunities available.
I’ve seen a few people comparing the last traded price of one gold ETF to another, and concluding that the lower priced one is cheaper, but that’s absolutely wrong because the last traded price is largely dependent on the NAV, and the NAV is in turn dependent on the assets a gold ETF owns, so comparing one with the other does you no good.
A cheap ETF based on price will be one which is trading at a significant discount to its NAV, but the chances of finding that for a retail investor are really slim, so I won’t worry too much about it.
With that in mind, let’s look at the reasons why prices between various gold ETFs vary.
Active trading
I’ve already touched upon the first reason which is the fact that ETFs are actively traded, so prices will differ due to the trading at that point in time.
Expenses
All ETFs have expenses that are paid out by selling gold holdings or using the income from their debt holdings, so although theoretically one unit of a gold ETF represents a gram of gold – in reality the gold holdings are slightly lower due to the expenses. The higher the expenses, the lower would be the NAV, and consequently the trading price of the ETF.
A good example of this is the Reliance gold ETF which had a NAV of 1920.20 on 13th Feb 2011, and was trading at Rs. 1913 on that date.
Compare that to Benchmark GoldBEES price of Rs. 1965.20, and you might think that Reliance is cheaper than GoldBEES, but in fact the opposite is true because Reliance charges higher expenses than Benchmark!
Higher expenses means less lower returns for you, and a fund with lower expenses is better for you.
So, expenses eat into the NAV of the various ETFs, and affect their prices.
Composition of assets
Gold ETFs not only hold gold bars, but also debt instruments and cash for some liquidity, so that makes a difference to the NAVs of the different ETFs. I don’t know how much of a difference this factor makes, but I’d think this factor plays a larger role than active trading, but a smaller role than the expenses that are paid out.
Conclusion
These three factors contribute to the variation in the prices of the different ETFs, and if you are looking for a cheaper gold ETF then you should compare the expenses that different fund houses charge instead of the price at which they trade.
You should also check out my post on the best gold ETF to get a perspective on the factors you should consider before deciding on what ETF to buy.
