Looking At The Positive Side

This refers to the write up on deep discount bonds by Madhu T ("Not worth the wait" BS 10/9/96). The author observes that (compared to DDBs) an option like public provident fund (PPF) may be safer, the subscriber (to PPF) enjoys a 20 per cent rebate in income tax and the interest earned at the rate of 12 per cent is tax free.

True, PPF is a safe risk-free investment. It has also some added advantages like flexibility in rate and time of subscription, facility of partial withdrawal after a lock-in period etc. But as far as total accumulation, net of tax, goes, the DDBs floated by IFCI recently seems to give a higher yield over a period of 30 years. An investment of 5,000 today in the said IFCI bond (family bonds) results in an accumulation (after 30 years) net of tax of Rs 3 lakhs (assuming 40 per cent tax). For comparison, the investment in PPF should be taken as Rs 6,200 though the net cash outflow would be only Rs 5,000 because of the 20 per cent tax rebate (assuming the subscriber is an income tax assessee). PPF accumulations roughly treble every ten years. Hence, Rs 6,200 would grow to Rs 1.68 lakhs approximately after 30 year. As the accumulations are entirely tax free, the total amount will be in the hands of the subscriber.

Obviously, as matters stand today, the IFCI DDBs is more attractive.

The main attraction of such an issue, for the small investor is that Rs 5,000 has, for all practical purposes, no opportunity cost. The lumpsum to be received after 30 years could come in handy for his own use or for the use of his wife or children.

True, inflation will eat massively into the value of these amounts. But then inflation is a factor common to any long term risk free investment (including bank deposits).

Of course, no one can say for certain today whether any of the crucial parameters (like interest rate, tax rate etc) on which these calculations are based will remain the same (or at about the same level) when the time frame is as long as threedecades.