After a long long wait, Equity investors had something to cheer about after the presentation of the 1999 Budget. Stock markets have flared up after the budget by over 10 % in three days recording one of the sharpest raises of all times. The budget has given some specific benefits to all Equity investors whether they seek dividends or look for capital appreciation. The exemption given to Equity based Mutual Funds from Dividend tax means that they can now declare higher dividends without a corresponding tax obligation. Such dividends are also tax free in the hands of the investors. Similarly the long-term investors also have something to be happy about since the long-term capital gains tax has been reduced from 20 % to 10 %.

While we can discuss the emerging equity investment opportunities in the forthcoming articles after the budget euphoria settles down, we can look at one opportunity which is available only during this week for Fixed Interest Investors.

The traditional Fixed Deposit investors and Bond investors will not be so happy with the post budget developments since the reduction of interest rates by RBI for lending has brought down the interest rates on the fixed investment instruments as well. Many of the banks have already announced reduction of interest rates by 1 % p.a. and a general reduction of interest in the debt markets is inevitable. Fixed interest Investors have to therefore re-fix their yield expectations and plan their investments accordingly.

It is in this context that we can look at the IDBI Flexi Bond 6, which is already open and will close on March 15 th. This issue was structured before the budget and therefore offers returns at the then prevailing levels with a maximum of 14 % pa. The reduction of interest levels in the market now has made this bond more attractive than what it was earlier meant to be. In this sense it is a special opportunity created by the budget.

This issue is offering 4 schematic options namely the "Infrastructure Bond", "Retirement Bond", "Growing interest Bond" and the "Regular Income Bond". The options available for the period of investment extend from one year in the Growing Interest Bond to 14 years in the Retirement Bond. The yield levels vary between 11 % p.a for one year to 14 % pa for 7 years and above. In the case of Infrastructure bonds which provide an Income tax benefit under section 88, the returns are around 12.5 % pa . The minimum investment period is 1 year in case of the growing Interest Bond, 3 years in case of Infrastructure bonds and Retirement Bonds and 5 years in the case of the Regular Income Bond. The interest rate in the Growing Interest Bond which can be encashed any time after one year will however vary from 11 % pa. for the first year to 20 % in the 7 th year.

Interest payment in the case of Regular Income Bond can be claimed on quarterly, half yearly or on yearly basis. In the Growing Interest Bond and in the Infrastructure Bond interest is paid annually. Cumulative interest option is available only in the Infrastructure Bonds. The Retirement Bonds provide for repayment through annuities after a minimum waiting period of 3 or 5 years.

Of the various schemes, the Growing Return scheme which provides an automatic hedge against inflation and withdrawal facility any time after one year appears to be the best choice for ordinary investors. The Infrastructure Bonds are of course of a special category that is of interest to persons who o would like to avail 20 % tax rebate available under section 88 or the Capital Gains Tax exemptions available under sections 54 EA and 54 EB.

Even though the Bond Issues from Financial Institutions is a regular feature, Flexibonds 6 deserves a special attention for Investors who don’t want to stray from Fixed Return instruments as an opportunity that has a built in bonus return, right from day one.

Na.Vijayashankar

6th March 1999