Invest your money carefully!

he good news about the IDBI Bond issue is that the Tax Savings Bonds can form a crucial part of your tax planning.

Let's take a look at what the other (non tax-saving) bonds on offer.

Note: these do not have any tax benefit.

IDBI Growing Interest Bond

This one has a slight twist. The minimum you will have to invest is Rs 10,000 (2 bonds of Rs 5,000 each) for five years.

You will earn interest on it every year. For the first year, the rate of interest is 5.5%

And, every year, it increases slightly till it touches 7% in the fifth year.

So, every year, you can expect a slightly higher amount as interest. If you invest Rs 30,000, your interest earning of 5.5% will get you Rs 1,650 in the first year.

In the fifth year, your interest earning of 7% will get you Rs 2,100.

The overall yield will work out to 6.3% per annum.

IDBI Retirement Bond

There are a number of options under this category.

Broadly, we have put them down under two situations. When you figure which one you want to identify with, you will be able to narrow down your choice.

The minimum number of bonds you can buy is six, each with a face value of Rs 5,000. That means you have to part with at least Rs 30,000.

~ Situation I

You invest Rs 30,000. You would you like the entire amount (Rs 30,000 + interest earned) to be given you during the tenure of the bond. That means, on maturity, you will get no lumpsum.

Your choice: Option A and C

Payments under these bonds will be made every quarter (four times a year) and will be a combination of interest and principal. So on maturity -- end of the bond tenure -- you get nothing.

Option A = 7-year bond

From the very first year, you begin to get payments. Every quarter, you get Rs 1,360. Since seven years have 28 quarters, you will get Rs 38,080 (Rs 30,000 is what you invest, Rs 8,080 is what you earn) from IDBI.

How to compare it with other investments: If you invested Rs 30,000 for seven years and at the end of that period, you got Rs 8,080, your actual return would be a measly 3.5% compounded annually.

Option C = 10-year bond

You don't get payments immediately. For the first three years, you get nothing. Payments begin from then on.

Every quarter, you will get Rs 1,685. Since you will get these payments only for 7 years, not 10, you will get paid for 28 quarters. That means, you will get from IDBI Rs 47,180 (Rs 30,000 is what you invest, Rs 17,180 is what you earn).

How to compare it with other investments: If you invested Rs 30,000 for 10 years and at the end of that period you got Rs 17,180, your actual return would be around 4.7% compounded annually.

~ Situation II

You invest Rs 30,000. You would you like the principal (Rs 30,000) to be returned to you at the end of the tenure but want the interest payments regularly.

Your choice: Option B and D

Interest payments under these bonds will be made every quarter. Principal will be returned later.

Option B = 7-year bond

From the very first year, you begin to get payments. Every quarter, you will get Rs 515.

Since seven years will have 28 quarters, you get Rs 14,420 as interest payments from IDBI. Your initial investment of Rs 30,000 will be returned at the end of 7 years.

How to compare it with other investments: If you invested Rs 30,000 for seven years, and at the end of that, earned Rs 14,420, your actual return would be around 5.75% compounded annually.

Option D = 10-year bond

You don't get payments immediately. For the first three years, you get nothing. Payments begin from then on.

Every quarter, you get Rs 845. Since you will get these payments only for seven years, not 10, you will get paid for 28 quarters.

That means, you will get Rs 23,660 as interest payments from IDBI. Your initial investment of Rs 30,000 will be returned at the end of 10 years.

How to compare it with other investments: If you invested Rs 30,000 for 10 years and at the end of that period earned Rs 23,660, your actual return would be around 6% compounded annually.

IDBI Regular Income Bond

Do you need the interest to be paid twice a year? Then you will have to invest at least Rs 30,000 (6 bonds of Rs 5,000 each).

Do you need the interest to be paid once a year? Then you will have to invest at least Rs 10,000 (2 bonds of Rs 5,000 each).

Do you want it all on maturity? Then you will have to invest at least Rs 10,000 (2 bonds of Rs 5,000 each).

The conclusion

• At all costs, avoid the Retirement Bonds (option A and C) which return to you all the interest and principal during the tenure of the bond and give you nothing on maturity.
  
• If you are looking for one with the lowest tenure, then the Growing Interest Bond is the least with only five years.
  
• If you are looking at annual interest, opt for the Regular Income Bond (Option A and D). The yield is higher than the Growing Interest Rate bond. But if you need more money as the years go on, then the Growing Interest Rate bond will serve your purpose.
  
• The best bet will be the Regular Income Bond with the cumulative option. Which means the principal (money you invest), and the interest you earn will all be returned on maturity. This allows for the interest rate you earn every year to get added to your principle so you earn even more due to the compouding effect.
  
• If you are thinking of a 10-year option, consider it carefully. It is a long time frame and it would be wiser to consider locking your money for seven years instead.

All said and done, the IDBI bond option is nothing to write home about. 

In fact, investing in NSC (National Savings Certificate) is only for 6 years (better than 7 and 10) and offers 8% per annum. What's more, you get a tax rebate too.

Some companies like HDFC also offer fixed deposits and the interest rate will be around the same (5.75% to 6.25%), but for smaller durations.

For instance, from three years on, you get a rate of 6.25%.

If you really are keen on blocking your money for 7 to 10 years, or you need a regular income coming in from your investment, then consider these deposits.