SBI bonds a good investment option

SBI is back again with its second long tenure bond issue. It had raised Rs1,000 crore in October 2010 and is now contemplating raising another Rs2,000 crore with an option to retain over-subscription in the retail category. The bonds are issued in two categories — retail & non-retail -and are available for the tenure of 10 and 15 years.

The closing date is irrelevant. Going by the response to the company’s earlier bond issue, it is most likely to get oversubscribed by end of the first day. Hence, those who are willing to invest in this instrument should ensure that they submit their application forms on the first day itself.

This brings us to the procedure for subscribing these bonds. These bonds are not available for online subscription and one has to visit a SBI branch to collect and submit the application form.  A demat account is mandatory and these bonds will be listed on stock exchanges. Hence, it provides liquidity if someone wants to sell the bonds before completion of the tenure.  

The interest earned on these bonds is taxable and if they are sold on the stock exchange they are also liable for capital gain tax.

How does it compare with other investment options (for retail investors)?

Though these bonds are unsecured, it carries AAA rating by Crisil and is issued by one of the most trusted banks in India. Hence, an investor can be reasonably assured of the investments.  There are very few comparable options available for such a long tenure. The table above (Table 2) gives a comparison of other investment alternatives available for retail investors.

There is a dearth of options for anyone looking to invest for 15 years, except for PPF and this long tenure makes SBI bonds attractive. The retail bonds score over all forms of investments, except for  PPF.  However, in the case of PPF, there is an upper limit of Rs70,000 per annum whereas, one can invest up to Rs5,00,000 in SBI bonds. Hence, for an  investor who has exhausted his PPF limit for the current  year, these bonds provide
good long-term investment opportunities.

The writer is a chartered accountant and blogs at http://bachhat.blogspot.com. He can be reached at vishalbharatshah@gmail.com