IIFCL Tax Free Bonds

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

After REC and PFC, IIFCL will become the third company to launch its tax-free bonds this financial year from December 26th. But, unlike REC and PFC, this will be IIFCL’s first issue of tax-free bonds as the company did not have any such issue last year. The issue will close on January 11th.

The company plans to raise Rs. 1,500 crores from the issue with an option to retain oversubscription up to Rs. 9,215 crores.

Despite of the fact that different companies are issuing these tax-free bonds, still as per the CBDT notification, they are bound to keep all of the terms quite similar to each other. There are few terms which are different.

What’s different or unique in this issue?

20 Year Option: IIFCL is the only company which has been allowed to issue tax-free bonds with an additional option of 20 years along with 10-year and 15-year options. IIFCL is offering 7.90% per annum for its 20-year option.

NRI Investment: Also, REC and PFC did not allow NRIs to apply for these bonds during their offer period. But, NRIs can participate in the IIFCL issue. They can apply for these bonds both on repatriation basis as well as non-repatriation basis.

Terms of the Issue

Apart from the 7.90% p.a. 20 year option, IIFCL will pay 7.69% and  7.86% per annum for the 10 year and 15 year options respectively. These rates are applicable for the Retail Investors category only and all other investors will get 0.50% p.a. less i.e. 7.40%, 7.19% and 7.36 for QIBs, corporates and HNIs for 20, 10 and 15 years respectively.

Again, the additional incentive of 0.50% will be payable to the original allottees only who invest in these bonds during this offer period. In case these bonds are sold or transferred by the original allottees, except in case of transfer of bonds to legal heir in the event of death of the original allottee, the coupon rates will be revised downwards to the base coupon rates.

The investors have the option to apply for these bonds either in the demat form or physical form and thus, demat account is not mandatory to apply for these bonds.

The issue is secured in nature and has been rated ‘AAA’ by CARE, ICRA and Brickwork Ratings. The bonds will get listed only on the Bombay Stock Exchange (BSE) and that too, within 12 working days post closure of the issue.

The minimum amount of application is Rs 5,000 with face value of Rs 1,000 per bond.

40% of the issue is reserved for the retail investors, another 30% of the issue is reserved for the high net worth individuals (HNIs) i.e. for the individual investors investing above Rs. 10 lakhs. 15% of the issue is reserved for the institutional investors and the remaining 15% is for the corporate investors.


India Infrastructure Finance Company Limited (IIFCL) is not a well known company among the investors as it is a relatively new company to have come into existence. IIFCL is a wholly-owned company by the Government of India, which got incorporated in early 2006. It has been created with an objective of providing innovative financing solutions to promote and develop world class infrastructure in India.

As per S. K. Goel, the Chairman and Managing Director of IIFCL, this issue might be the last such issue from IIFCL as the Finance Ministry is not too happy with the Government losing huge tax revenue with their tax-free status. If this is the case, then the investors in the highest tax brackets should not wait too long for the other issues to invest in.

Click here to download the application form

What the MOIL IPO teaches us about IPO investing?

As the government decides to sell stakes in PSUs in the coming months, you are going to see a slew of companies coming out with their stock offering and with the current economic environment, it is very easy to get carried away and invest a disproportionate amount of money in IPOs.

I’m already seeing the excitement around IPOs build up although the retail participation so far has been nothing compared to what we have seen in the past.

If you remember the MOIL IPO – the retail part of that was subscribed about 3o times over! 

For most people, it is ridiculous to think about something that happened two years ago, and guess what? Most people continue to make the same mistakes over and over again.

Nothing about IPO investment has changed, and in the coming months, you will most likely see sentiment pick up and over-subscription levels reach ridiculous highs.

When that happens, consider this chart that I made over two years ago.


What this chart shows is that the number of IPOs rise when the market conditions improve, and that makes total sense when you think about it. Promoters are interested to extract maximum value out of their stakes and why would anyone who can wait sell their stakes when the markets aren’t doing well?

But at the same time, when the market goes down, all these stocks also go down with it, and that results losses on stocks you bought in IPOs and also much worse, stocks that you bought just after the IPO.

I took the MOIL example for this post because the company was doing and is doing quite well and the oversubscription was so high that people got allocated only a few shares, and then after listing bought more of it, and suffered losses on those too.

As the frenzy surrounds you in the next few months –  be patient and at the very minimum avoid investing in any IPOs that have bad fundamentals.

The one big learning of 2012

As the year draws to a close, I’m sure everyone is feeling quite pleased with their portfolios. I don’t see anything that has gone down this year, and I think this is one of those years where you couldn’t have lost money even if you wanted to.

Zooming out a little, things aren’t so rosy, India is at about the same level as it was five years ago (actually -3.14%), and if you regularly invested in the market in this time, you would have had negative real returns at this point.

However, when I look at my own portfolio, which has always entirely consisted of stocks or cash – things haven’t been that bad. (In this time period, I have invested in both US and Indian equity markets.)

I am very glad to be lucky in this respect, but the one thing that I have seen in the past few years is that your returns are not linear and gains as well as losses will be concentrated in a short time frame, and you should be properly positioned for those time periods.

Most people lose money because they start investing at the wrong time, and then compound things by getting into penny stocks, and other momentum trades which ultimately pan out very badly.

For example, I see a lot of people talking about stocks, and boasting about their investments right now when the market has already risen so much. These very people likely stopped investing last year when the market was doing badly and presented a great opportunity to buy.

When the market goes down again (which it eventually will) you will see the same people talking about exiting stocks completely, and talking as if stocks will never recover. That will be the best time to invest, but I’m fairly certain that majority of the investors will either be pruning down investments at that time or selling out completely.

This is nothing new and has been talked about by people zillions of time, but somehow when the market is up, people think that they will easily able to stomach a 20% fall, but when the fall materializes, they just completely panic.

The way 2012 has panned out makes me feel that investing regularly is not enough, you really need to take advantage of the bad times or the times of crisis. If you aren’t aggressively buying during crisis periods, the volatility and high blood pressure that the market brings you will never be worth the returns you make from it.   At the same time you need to temper down when the market is up, and when your neighbor and his dog are making a killing in the market. As far as the market is concerned, nothing is worse than following the herd.

List of India Based ETFs in USA

When I did the post on the best India based ETFs in US, I noted that there were several new ETFs since I last did the post and all of them were different from one another.

In this post I’m going to list down each of those ETFs along with a brief description of what their intended goal is. I have left the YTD returns as it is in the table just for reference.




YTD Return*


1 EGShares India consumer (INCO)   50.25% It is an ETF that invests in companies that belong to the consumer sector in India. It owns stocks of the Indxx India Consumer Index, a 30 stock free-float adjusted market capitalization index designed to measure the market performance of companies in the consumer sector of India.
2 iShares S&P India Nifty 50 Index Fund (INDY)  29.47% This ETF invests in the stocks that form Indian Nifty. The iShares S&P India Nifty 50 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P CNX Nifty.
3 India Infrastructure ETF (INXX) 29.11% This ETF invests in the infrastructure sector companies in India. The EGShares India Infrastructure exchange-traded fund (ETF) seeks investment results that generally correspond performance of the Indxx India Infrastructure Index. The Indxx India Infrastructure Index is a free-float market capitalization weighted stock market index comprised of 30 leading companies that Indxx, LLC determines to be representative of India’s Infrastructure industries, as defined by the Industry Classification Benchmark (ICB). 
4 EGShares India Small Cap (SCIN)  28.89% The EGShares India Small Cap Exchange Traded Fund (ETF) seeks investment results that generally correspond (before fees and expenses) to the price and yield performance of the Indxx India Small Cap Index. The index is a free-float market capitalization weighted stock market index comprised of a representative sample of 75 Indian companies that Indxx, LLC determines to be the representative of small market cap companies in India.
5 India Small Cap Index ETF (SCIF) 26.5% The Market Vectors® India Small-Cap Index ETF (SCIF) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors India Small-Cap Index (MVSCIFTR), a rules-based, modified market capitalization-weighted, float-adjusted index intended to provide exposure to Indian small-cap companies.
6 iPath MSCI India Index ETN (INP)  26.89% This is a Note and not a fund which means it doesn’t actually own the underlying assets and is like a debt instrument which pays you returns equivalent to the index.iPath MSCI India Index ETN is an exchange-traded note issued in the USA. The Notes will provide investors with a cash payment at the scheduled maturity or early redemption based on the performance of the underlying index, the MSCI India Total Return Index.

7 WisdomTree India Earnings Fund (EPI) 23.93% It is an ETF that invests in about 200 large Indian companies.
8 PowerShares India Portfolio (PIN)  13.94% The PowerShares India Portfolio (Fund) is based on the Indus India Index (Index). The Fund will normally invest at least 90% of its total assets in securities that comprise the Index and American depositary receipts based on the securities in the Index. The Index is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges.
9 Direxion Daily India Bull 3X Shares (INDL)  22% This ETF is only meant for people who are interested in very short term trading and understand that this ETF seeks to magnify daily performance three times and the same result won’t be achieved on a longer timeframe.
10 MSCI India Index Fund (INDA)  NA

The MSCI India Index is designed to measure the performance of the large and mid cap
segments of the Indian market. With 73 constituents, the index covers approximately 85%
of the Indian equity universe.

11 MSCI India Small Cap Index Fund (SMIN) NA The MSCI India Small Cap Index is designed to measure the performance of the small cap
segment of the Indian market. With 205 consituents, the index represents approximately
14% of the free float-adjusted market capitalization of the India equity universe.

*Returns as on Nov 29 2012.

Weekend Links: Dec 14 2012

I wasn’t about to do a links post today because I’m short on time, but when I browsed through the links I had saved for this week, I thought I would do a quick post anyway because of the great range I have this week.

The best 7 things I read this week:

Tim Cook’s Interview: The Apple CEO Speaks

FinMin Pressures RBI to Prolong Housing Bubble?

Fortune Exclusive: Larry Page’s Interview

How Outlook handles time zones for meeting requests

Orange used cars break down less than others

Lion Numbers Plunge as African Wilderness Succumbs to Human Pressure

Should I buy or rent a house?

Aviva India Dhan Samruddhi Guaranteed Returns Policy

This is the third guaranteed returns product that I’m looking at here in the past two weeks, and I’m quite embarrassed to admit that I can’t understand how this product works.

I’ve tried to explain what I’ve understood of it but I’m certainly open to comments from people who understand this better than me.

Premium Payment

Let’s start with the thing that is amply clear, viz. the premium payment term is 10 years regardless of how long you take the policy for.

Policy Term

So you pay premium for 10 years, but you can take the policy for 10, 15 or 20 years.

Survival Benefit

At the end of every five years (except for when the policy is maturing) you get 125% of the annual premium if you survive, which is called ‘Survival Benefits’ in insurance jargon.

Guaranteed Additions

There is this thing called guaranteed addition in this product and what they do is add 7% of the annual premium to the survival benefit at the end of the 5th year, 8% at the end of the 10th year, and 9% at the end of the 15th year.

However, if I’m reading this correctly, they don’t actually pay you these guaranteed additions at the end of the 5th, 10th or 15th year, rather these additions accrue to you, and you need to wait for maturity to get these benefits.

Maturity Benefit

At the maturity, they give you the sum assured plus your guaranteed additions minus the payments they have already made to you during the course of the policy.

I think if you took a 20 year old policy, this is how your payments will look like at various years. The product brochure says that for a 35 year old, the sample premium for getting Rs. 1,00,000 insured is Rs. 6,585 which is what I have taken.


Year Premium Survival Benefit Guaranteed Addition Maturity Benefit
1 Rs. 6,585
2 Rs. 6,585
3 Rs. 6,585
4 Rs. 6,585
5 Rs. 6,585 Rs. 7,408 Rs. 461 (7% of premium)
6 Rs. 6,585
7 Rs. 6,585
8 Rs. 6,585
9 Rs. 6,585
10 Rs. 6,585 Rs. 7,408 Rs. 527 (8% of premium)
15 Rs. 7,408 Rs. 592 (9% of premium)
20 Rs. 1,00,000 + (Rs. 461 + 527 + $s. 592) – (7,408×3)


I’m quite uncertain about the guaranteed addition in this product mainly because I’m unable to understand if they are going to give you 7% of the premium at that year or will they add that 7% for every year that you have held that policy? Similarly for 8% and 9%?

Usually, I shy away from writing about products where I have so many questions myself but I see that almost every website that has written about them has reproduced the press release with a few edits, and don’t do much to advance the discussion.

I hope this will post will at least arm you with the right set of questions to ask your agent if they approach you to sell this product.

PFC Tax Free Bonds Review

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Power Finance Corporation (PFC) will be launching the second public issue of tax-free bonds this financial year (FY 2012-13) from the coming Friday, December 14th, 2012. The company plans to raise Rs. 1,000 crore in this issue with an option to retain oversubscription to the tune of Rs. 3,590 crore, making the total size of the issue to be Rs. 4,590 crore.

PFC plans to use the proceeds for company’s lending purposes, debt servicing and
working capital requirements, subject to the terms and conditions of the CBDT Notification.

Details of the Issue

Categories of Investors

As with all these issues, the investors would be classified in the following four categories:

Category I – Qualified Institutional Buyers (QIBs)
Category II – Non-Institutional Investors (NIIs) or Corporates
Category III – High Net Worth Individuals (HNIs)
Category IV – Retail Individual Investors (RIIs)

40% of the issue is reserved for the retail investors, another 20% of the issue is reserved for the high net worth individuals (HNIs) i.e. for the individual investors investing above Rs. 10 lakhs. 25% of the issue is reserved for the institutional investors and the remaining 15% is for the corporate investors.

Rate of Interest/Coupon Rate

There is not much difference between this issue and the REC bonds issue which closed on Monday, December 10th. PFC will pay a base coupon rate of 7.36% and 7.19% per annum to the Category I, II and III investors with a maturity period of 15 years and 10 years respectively.

As with the REC bond issue, PFC will also pay an additional coupon of 0.50% p.a. to the retail investors over and above the base coupon rate, making it 7.86% and 7.69% per annum respectively. Interest will be payable annually as there is no cumulative interest option.

But, the additional incentive of 0.50% will be payable to the original allottees only who invest in these bonds during this offer period. In case these bonds are sold or transferred by the original allottees, except in case of transfer of bonds to legal heir in the event of death of the original allottee, the coupon rates will be revised downwards to the base coupon rates.

The interest earned will be exempt from tax under section 10 (15)(iv)(h) of the Income Tax Act, 1961.

Retail investors can invest up to Rs. 10 lakhs in the issue and still get the additional coupon of 0.50%. The company has decided to keep the minimum investment requirement of Rs. 5,000 (or 5 bonds of face value Rs. 1,000).

Listing, Safety and other features of the Issue

Demat account is not necessary to invest in these bonds. Investors have been given the option to apply these bonds in physical form also. Like last year, PFC bonds are going to list only on the Bombay Stock Exchange (BSE).

NRIs and foreign nationals among others are not eligible to invest in this issue. The allotment will be made on a “first-come-first-served” basis.

The issue has been rated ‘AAA’ by CRISIL and ICRA. The issue is secured in nature and in the event of default, the bondholders can claim a charge upon the assets of the company in connection with these bonds.

The issue will close on December 21st, 2012. The bonds will get allotted and listed within 12 working days from the closing date of the issue.

How 7.86% is fixed and will the forthcoming tax-free bond issues carry higher rate of interest?

This financial year, there is a ceiling on the coupon rates these companies can offer based on the reference Government Securities (G-sec) rate. The coupon rate for ‘AAA’ rated issuers cannot be more than the reference G-sec rate minus 65 basis points (bps) or 0.65% in case of retail investors and G-sec rate minus 115 bps or 1.15% in case of QIBs, corporates and HNIs.

The reference G-Sec rate is the average of the base G–sec yield for equivalent maturity reported by the Fixed Money Market and Derivative Association of India (FIMMDA) on a daily basis prevailing for two weeks ending on the Friday immediately preceding the filing of issue’s prospectus with the designated stock exchange and the Registrar of Companies (RoC).

So, if the 10-year benchmark G-sec rate is 8.17% p.a. payable semi-annually, the reference G-sec rate would be equal to (((1+(0.0817/2))^2) – 1) * 100 = 8.34% p.a. Hence, 65 bps less than 8.34% p.a. is 7.69% p.a. payable annually.

Keeping this ceiling and slow economic growth into consideration, I do not think the future tax-free bond issues would be able to carry a higher rate of interest. In fact any interest rate cut by RBI due to an unexpected and further fall in economic growth would force the issuers to lower their coupon rates.

About Power Finance Corporation Limited

Power Finance Corporation is a listed Government of India undertaking with 73.72% stake held by the govt. The company provides financing to state electricity boards (SEBs), state generating companies and independent power producers (IPPs) for a range of power-sector activities including generation and distribution.

Performance of the PFC tax free bonds issued last year

Tax free bonds issued last year have given quite handsome returns to the investors in the range of approximately 15%-20% annualised. PFC tax free bonds closed at Rs. 1,086.10 on December 11th, 2012 carrying a YTM of 7.43%. These bonds paid a mid-year interest also on October 15th, 2012.

Given the current YTM of 7.43%, the rate of interest of 7.86% or 7.69% is still attractive for the retail investors in the 30% or 20% tax bracket with medium-term to long-term perspective.

REC has got a good response for its bond issue from the retail and HNI investor categories, probably because it was the first issue of these popular tax-free bonds. The timing of PFC issue is interesting as the RBI will be announcing its next monetary policy measures on December 18th. In case there is a rate cut by RBI, then the issue will become quite attractive for the retail investors and they can expect an appreciation in the market price of these bonds.

Click here to download the application form

Why has EGShares India consumer (INCO) risen 50% in the last year?

When I did the best performing US based India ETFs a couple of weeks ago, one name was leading the rest of them by wide margin.

EGShares India consumer (INCO) has risen by about 50% this year, and this is a lot more than any other India based ETF that exists in the US this year.

I was curious to see why this was the case and reader RK Patil sent an email to me with why this was the cause. Here’s what he said (slightly edited).

INCO’s good performance is due to concentrated holding in United Breweries & United Spirits due to take over chances.

Even Indian FMCG sector  funds (SBI Magnum FMCG) &ICICI FMCG  has shown good performance (more than 40%) due to ITC .

I looked at the breakup of the holdings of this fund and saw that what he was saying was exactly right. INCO owns 30 shares, and as of last Sunday here are its top ten holdings against which I have added a column of year to date returns as well.



% of total assets

YTD Return*

1 United Spirits Limited   7.88% 167.7%
2 Hindustan Unilever Ltd  5.82%  42.07%
3 United Breweries Ltd 5.62% 101.42%
4 Godrej Consumer Products Ltd 5.62% 85.4%
5 ITC Limited 5.38%  55.8%
6 Mahindra & Mahindra Ltd 4.89%  35.8%
7 GlaxoSmithKline Consumer Healthcare Ltd 4.72%  47.94%
8 Zee Entertainment Enterprises Ltd  4.68%  70.46%
9 Titan Industries Ltd  4.66% 67.28%
10 Tata Global Beverages Ltd  4.57%  92.46%

*Returns as on Dec 09 2012

As you can see from the numbers above a few of their stocks have done so well that it has given a tremendous boost to the fund performance. This of course can’t be a basis for long term selection into this ETF because who knows whether they will be able to own other stocks that do so well in the future or not.

This fund is focused on consumer sector in India and if this was the sector you wanted to get exposure to you should buy the fund, and not this year’s performance alone.  Some of these stocks have done great this year, but in a down market such stocks can go down a lot as well.

This table brings to mind another interesting question which is what do you do when you see one or two companies in your portfolio do too well and they account for a large majority of your portfolio? I’m sure a lot of people have seen this situation int the past year, and in a future post I’ll share some thoughts on what I do when I encounter such a situation.

MahaLife Supreme Endowment Insurance Plan

A couple of weeks ago I wrote about SBI Life’s Smart Income Protect and a similar product was launched by Tata AIA recently in which you pay money for 12 or 15 years, and then it pays you a guaranteed sum for a set period.

This product is Tata AIA’s MahaLife Supreme Endowment Insurance Fund.   

The idea is that you pay a premium for either 12 or 15 years, and then based on that the MahaLife Supreme plan will pay you for 18 or 20 years. There is an insurance component as well where they will give you a life cover of ten times the premium.

The annual payment that they make to you is also calculated as a percentage of your sum assured and has a tiered structure.

First, let’s take a look at the two key options of this plan.

Plan Option

Option A

Option B

Max Entry Age

55 years

55 years

Policy Term

35 years

30 years

Premium Payment Term

15 years

12 years

Policy Pays You For

20 years

18 years

Minimum Premium

Rs. 15,000

Rs. 20,000

An example of how the money will be paid out is given in the brochure of the product, and for Option A they have the following details:

Option A

Age of the life insured Annual Premium Basic Sum Assured Guaranteed Annual Income Maturity Benefit
35 years 50,000 500,000 Rs. 52,000 734,500

So in this example, you pay Rs. 50,000 for 15 years at the end of which the company pays you Rs. 7,34,500 and then for the next 20 years pays you Rs. 52,000 per year.

I created a spreadsheet to calculate the IRR for this it came out to be 4.2%. However, the assumption that I have made is that you get the maturity benefit at the end of 35 years (policy term) and not 15 years, which is the premium payment term.

If you get the maturity benefit at the end of 15 years then the IRR is an excellent 7 plus percent, and with the added insurance and tax benefits I would say that this is a good product. So if someone can clarify when the maturity will  be paid that will be great.

The tax benefit is that the premium is eligible under Section 80C and you can take advantage of that if you haven’t already exhausted the 80C limit.

This plan is quite similar to the SBI Life Income Protect but there are two key differences.

First, the lump sum payment is made earlier in SBI Life Income Protect than in this plan, where that plan pays the lumpsum at the end of the premium payment term, this plan pays it at the time of maturity.

The second difference is that in this plan you know what you will get paid right from day one, whereas in that plan there is a variable component so there is that bit of uncertainty of how much will be added to the variable part based on the company’s profits.

Finally, the big similarity is that they are both guaranteed income products so the returns are relatively lower as you’d expect, and as I said in the earlier post, you can’t rely on these type of products for insurance and at best, they can only supplement whatever existing insurance you have.

Need Suggestions for a Series of Posts for Beginners

One of the things I’ve really struggled with over the years is creating a series for beginners. A lot of people have asked for it and I know there is a lot of value in it for both the readers and the blog.

This topic came up again when Manu J who was new to the site asked where you should start reading and Tweeted the following to me last week:

He pretty much stated something that has been repeated over and over again, which is essentially how do you go about financial planning if you don’t have any plans right now?

I tried to go about finding an answer for him but this isn’t something I’m able to do on my own.

So, I seek your help to give me ideas on this topic. What are the things that you would look for when you are just looking at starting your investments and financial planning?

What are the topics and posts here that have helped you and should feature in such a series for beginners?

Anything that comes to your mind.

Unlike other series I have done here, I will only start writing such a series if I can narrow down twelve topics before hand and then cover one every week over a period of 3 months. If I think I can’t do that then I won’t start the series because if there isn’t even content for 12 posts then it’s not worthy of a real series.

All your help is greatly appreciated, please leave a comment here, on Facebook or reply to me on Twitter.