Fi Bonds

In the event of interest rates coming down, IFCI can exercise the call option and the investor's dreams of becoming a millionaire or getting a lump sum on retirement or getting the money for his children's education go for a toss.

FIs will argue that the investor has been made aware about this possibilty. This argument can be taken at face value if the deal is between two players of the same class. The fact is that the institutions can interpret the effect of a put and call option better than a lay investor.

Will the investor exercise his put option if interest rates went up? Probably not, because if he were bothered about interest-rate movement, he would have opted for the regular return bond. The overriding factor behind the decision to invest in any such deep discount bonds is the lure of a lumpsum reciept.

 

It is not that IFCI is the only one guilty of this gimmick; all the FIs are. The quartet should not have played on words and should have, instead, played up the call option and then the name of the bond, necessarily in that order. In the event of premature redemptions, the investor would feel cheated and would never again invest in such products.