It is raining bonds. As many as five different infrastructure bond offers are now open for subscription by the public. Should you buy them? Yes. But selectively. It is a good idea to lock into infrastructure bonds.

They offer a good deal amongst the various debt options.

With yields on government securities beginning to moderate, interest rates (which are linked to gilt yields) on future bond issues may not be as high as the current ones. Already, rates on the current tranche of issues are lower than what was offered a month or two ago.

Investments up to Rs 20,000 in these bonds are eligible for tax deduction under Section 80CCF. This helps enhance the actual return to the investor.

This makes the bonds a good option if you have not already exhausted the Rs 20,000 limit by investing in previous bond offers.

To get the maximum benefit, go for the cumulative option. This option accumulates interest instead of paying it out every year. This means interest gets re-invested at the bond's coupon rate.

You need not choose an annual payout as the cash flows will be trivial on a Rs 20,000 investment.

In addition, if the bond offers a buyback plan, do opt for it.

The buyback option offers the flexibility to exit if better rates are available on alternative debt instruments after the lock-in period expires.

Safety vs. Return

That said, which of the five bonds should you choose?

Going by interest rates alone, the offer from SREI looks attractive. The post-tax yields on SREI's 15-year bonds (cumulative and buyback after 5 years) are the highest of the lot, when compared with SREI's own 10-year bonds and the offer from L&T Infra and IDFC.

Suppose your tax rate is 30 per cent, after factoring in the tax savings on the Rs 20,000 invested, the interest rate of 9.15 per cent on the 15-year bonds ( cumulative and buy back after 5 years) rises to 17.5 per cent.

This is hence comparable to investing in a bond or fixed deposit offering 17.5 per cent return.

At 20 and 10 per cent tax rates, the effective comparisons would be 14.3 and 11.5 per cent respectively.

However, this higher return from SREI Infra bonds comes with higher risk. In comparison with IDFC and L&T, SREI has a lower credit rating (AA from CARE).

IDFC enjoys AAA rating by ICRA and Fitch indicating highest safety and stable outlook. Its capital adequacy ratio as on September 30, 2011 stood at 22.87 per cent and its net NPA ratio, at 0.09 per cent. L&T Infra is a relatively new player, incorporated in 2007.

It holds an AA+ credit rating from both CARE and ICRA, indicating high safety for timely servicing of debt obligations.

Though both IDFC and L & T Infra offer the same interest rate of 8.7 per cent, IDFC is the best bet for the conservative investor.

The yields for the cumulative and 5-year buyback option from IDFC stand at 17, 13.8 and 11.1 per cent for those in the 30, 20, and 10 per cent tax brackets.

Unlike many other investment options which require a demat account these days, you need not have one to apply for these bonds.

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