SBI is launching its second tranche of retail bonds from Monday 21st February to Monday 28th February.The size of the issue is Rs 1,000 crore, with an option to retain an extra Rs 1,000 crore. Allotment of these bonds will be done on a first-come-first serve basis, based on the date of the application.
Features of Bonds
The bonds are available in two series with diverse maturities: Series 3 will have a maturity of 10 years, with an interest of 9.75% for retail investors and 9.3% for high net worth investors (HNIs) and qualified institutional buyers (QIBs). Series 4 will have a maturity of 15 years, with an interest rate of 9.5% for retail investors and 9.45% for HNIs and QIBs. The face value of each bond is Rs 10,000 and one can apply for a minimum of one bond. The maximum size of application under the retail category is Rs 5 lakh and 50% of the issue size is reserved for retail applicants while the balance 25% is for HNIs and 25% for QIBs, respectively. These bonds are not secured and don’t have any lock-in. The bonds will be available only in the demat mode and it will be listed on the BSE and the NSE. While Series 3 bonds have a tenor of 10 years with a call option by SBI after five years, series 4 bonds have a tenure of 15 years with a call option after 10 years. The bonds are not redeemable at the option of the bondholder or without the prior consent of the central bank.
Should You Subscribe
1. Time Horizon– The time horizon of the bond is 10 year and15 years.This means, young or middle age investors can allocate this sum only for their long term goal such as child education and marriage.When you plan your long term goals you would like to invest where your money is compounded.Since their is no compounding returns, this investment will not be able to meet your even 25% of the desired target. I presume not many young investors will like to block 4-5 lakh investments for simple returns.
However, the retirees who have exhausted their SCSS and other fixed interest payment would like to consider this investment due to its annual interest payment structure.But then five lakh is the limit. So if you are investing one lakh you are getting Rs.9995 annually.Might be considered for a vacation trip annually or paying one of your health insurance premiums. Not a bad option.
2. Liquidity: This also is a major issue with the bond.Although it will be listed on stock exchange but i presume not many investors are conversant how the price of a bond works and what is the risk involved.So its only the HNIs or institution who will be very active in trading of this security.
Also if retail investor wants to exit premature call option or buy back is the route. The institution will be the major beneficiary from this since the option lies with it.
3.Net Yield: The net yield from this bond is highest for investors from lowest tax bracket.So if you are a high income tax payee the return might not be a very attractive proposition.For individuals in the tax bracket of 30.90% the net yield is 6.74% and 6.88% for series 3 & 4.But for individuals in 10.30% tax bracket, the net yield is 8.75% and 8.93% in series 3 & 4.
The above parameters highlights the various features available in these bonds. You need to weigh all your options before you subscribe. The comparison with other investments avenues cannot be done only on returns basis.For someone who is looking for regular income the bond can prove to be an attractive option because of high interest.But if you have surplus of Rs.50000 to invest, infrastructure bonds might prove to be a good investment options.
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