Last-minute infra bond buyers lose out on best deals

Investors in infrastructure bonds who were hoping for a repeat of last year’s gains may be in for disappointment this year if Larsen & Toubro’s latest offering is anything to go by.

The Tranche II of L&T infra bonds was launched on Monday and the issue is open till February 11.

The second tranche offers lower rates than the first one last month. The current rate of return is pegged at 8.70% per annum as against 9% that the infrastructure company offered in its December’s tranche.

In 2010-11, infra bonds launched towards the end of the year gave progressively higher returns as interest rates then were on an upswing.

This meant that investors who waited till the last minute got a better deal.

But, with interest rates looking to have peaked out this year, this is no longer the case now.

Among fixed-income products, infra bonds is the second-best option after bank FDs and National Savings Certificates.

Suresh Sadagopan, who runs Ladder 7 Financial Advisory services, says, “One should put money in this only if the person has exhausted his other options which come under section 80C. The interest rate is lower this time and post-tax returns are also not very lucrative compared to other fixed-income products in the market.”

The interest is payable annually or compounded annually.
“But it is advisable to have a cumulative interest pattern to take the advantage of compounding. Staying till maturity tenure is advantageous for investors,” says Sumeet Vaid, founder and CEO of Freedom Financial Planners.

Redemption in L&T bonds would 10 years from the deemed date of allotment and there are are three exit options.

The first one is at end of five years, the second at the end of seven years and the third at 10 years which is at the time of redemption.
“The bond having put, call or buyback option or when it is traded on the stock exchange can be sold before the lock-in period. The person is accountable to pay a capital gains tax of 20% based on indexation or a short-term capital gains tax of 30%,” Amar Pandit, financial planner and CEO, My Financial Advisor.

The L&T bonds have been rated CARE AA+’ by CARE and ‘[ICRA] AA+’ by ICRA that considers the offering high safe for timely servicing of financial obligations.

“Infra bonds perform well in a highly volatile capital market. Since India has a lot of upcoming infra projects, there will be a huge requirement of funds which can be sourced out of these collections,” says Suneet K Maheshwari, chief executive at L&T Infra Finance Co.