The much awaited Public Issue of SBI Bonds for lower tier II aggregating to Rs. 500 crores, oversubscribed 17 times already on day 1. This comes with an option to retain an over subscription of Rs. 500 crores. If you have not yet invested, then read on to know why it is a really sound investment decision.

If you haven’t considered the salient features of this Public Issue, then do it now.

Features:

Overall, the SBI bonds are an attractive proposition as they offer attractive coupon rates, which is about 9.25% for a period of 10 years and 9.5% for a period of 15 years.

Please see the comparison chart below with some savings instruments available in the market currently.

The results were as follows:

We have tried to pick up options that offer the greatest safety in terms of both capital and interest. Surprisingly, SBI bonds by far look to be the most attractive option amongst all the above available bonds.

There are two major differences between the bonds offered by IDFC and SBI –

Firstly, IDFC bonds offer a tax benefit of Rs. 20,000 under section 80CCF where as any investment in SBI Bonds is completely taxable. However, interests earned under both the options are completely taxable.

Secondly, SBI Bonds will be listed on the stock exchanges from the first day itself offering the investors complete liquidity. IDFC bonds will be locked in for the tenure (according to the option chosen) and will get listed on the exchanges only after the lock in period. By getting listed on the stock exchanges, SBI bonds may even get a chance of capital appreciation in case the prices of the bonds move up, but there is also a case of capital depreciation in case the prices of the bonds move down since these bond prices are inversely proportional to the interest rate scenario.

How to invest in to SBI Bonds?

One needs to have a demat account to buy SBI Bonds, as the bonds would be held in a demat format. Also please note here that these bonds are not covered under deposit insurance of the banks like Fixed Deposits.

The coupons of the bonds are very attractively priced at 9.25% and 9.5% per annum for a period of 10 years and 15 years respectively, making them attractive investment options for everyone who are looking for debt exposure in there portfolio. The 50 basis points step up option means the interest rate would increase from 9.25% to 9.75% and from 9.5% to 10% for the respective options make them more attractive. This option will be exercised if the call option is not implemented.

“If the interest rates applicable in the market post 5 years or post 10 years of the respective SBI Bond option are high then the call option would not be implemented and they will exercise the step up option. If in the market, the interest rate scenario is low then they will exercise a call option.”

It simply means that when the interest rate scenarios are low then the issuer exercises the call option as they pay their investors more than the then prevailing interest rates and if market interest rates are high they will exercise the step option by 50 basis points as investors could redeem the debentures and buy another attractive scheme at that given point in time. The scheme looks even better for senior citizens who do not  have many investment options for parking their accumulated retirement corpus today to invest. A Senior Citizen Savings Scheme (SCSS) fetch 9% pa payable quarterly and Post office Monthly Income Scheme (POMIS) pays 8% p.a. compounded quarterly. Both these schemes deduct TDS (i.e. Tax deducted at Source) unlike the SBI Bond as it is listed on National Stock Exchange (NSE).     

For people who do not want regular income as interest every year can choose for a SIP of the interest amount in to an equity diversified funds. This strategy will boost their returns keeping the capital protected.    

Compared to Bank FD`s, SBI bonds score high on liquidity as they will get listed the next day after the allotment procedure is completed.

Comparing the face value, lock-in-period and the listing of the bonds - IDFC long term Infra Bond has a lock-in-period of 5 years as you enjoy a tax deduction under section 80CCF. Post the lock-in the bonds will be listed on NSE BSE. So till the 5 year lock-in-period one can be sure for the capital guarantee or the face value. Where as in the SBI bond it does not have a feature of Floor price as it gets listed on the same date of the allotment. Depending upon the market scenario of interest rates, investor can enjoy capital appreciation and also there are chances of losing capital.

So isn’t it a good bet to invest in SBI Bonds?

The  author, Ushma Shah is senior research analyst with www.apnapaisa.com ,  a comparison site for financial products such as loans, investments and insurance plans. 

e-mail: Ushma Shah

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