Index funds are a relatively small part of the overall mutual fund industry in India, and this is markedly different from the west, where index funds do quite well, and in fact the biggest fund in the US is an index fund (SPY) that tracks the popular S&P 500 index.

I think there are two aspects to this – the first is that actively managed funds have performed better than index funds in the past and people expect that to continue in the future as well, and secondly, index funds aren’t really low cost in India.

First, let’s look at some data to see why I say actively managed funds have performed better than index funds.

To get this data, I took the list of mutual funds from my post on the best balanced funds and saw how they performed vis-a-vis GS Nifty BeES which is the biggest index ETF right now, and is fairly low cost as well.

Here is a table that shows the results.

S.No.	Mutual Fund	3 Year Return	5 Year Return
1	Goldman Sachs Nifty BeES	28.34%	8.29%
2	HDFC Prudence	38.64%	14.94%
3	DSPR Balanced Fund	25.05%	12.37%
4	HDFC Children’s Gift Plan Fund	37.61%	13.85%
5	Reliance Regular Savings Balance Fund	32.91%	14.81%
6	HDFC Children’s Gift Plan Fund	37.61%	13.85%
7	Birla Sun Life 95	29.77%	12.45%
8	FT India Balanced	22.85%	9.14%
9	Canara Robeco Balance	30.31%	12.04%
10	Tata Balanced Fund	29.58%	12.44%

As you can see, with the exception of DSPR Balanced Fund and FT India Balanced Fund in the 3 year period, the balanced funds did better than the index fund in the 3 and 5 year periods. I’m sure there are plenty of other examples like this and in this environment it just isn’t possible for index funds to get popular.

The question then is why do active funds do better than index funds in India? I’ve seen several theories on this but none that seem very convincing. Perhaps the confluence of all the factors make them do better or it could be something that isn’t talked about at all right now.

The chief theory that I’ve heard a lot is that the markets in the west are so deep and developed that they are efficient to a large extent and it is difficult for stock pickers to find mis-pricings and benefit from them. Indian markets are not so efficient so stock pickers are still able to find undervalued stocks and benefit from owning them. While this may sound plausible, the thing that makes me a little wary of this theory is that markets in the west are quite volatile as well so people can take advantage of stock prices when they are low, plus there are a lot of hedge funds that do beat the market so it isn’t like the market is very efficient.

The second aspect is that of cost and tracking error of the index funds themselves. The whole point of an index fund is that it should be extremely low cost since there is no active management needed but that low cost hasn’t really materialized in the Indian market.

In March 2010 I did a list Nifty index funds and Sensex Index funds, and saw that a lot of them charge in excess of 1% recurring expenses and that’s simply too high for an index fund. Since then there have been funds that charge much lower expenses, most notably the IIFL Nifty ETF that has an expense ratio of 0.25% which is the lowest of any index ETF till date. The biggest Nifty ETF – Goldman Sachs Nifty BeES ETF is also a low cost ETF which has expenses of about 0.50% and has been around for a decade now, but as a category – the low cost has still not become a norm, and that makes a difference to the returns.

So, I would say that the two main benefits of investing in index funds – which is low costs and doing better than active funds have been more or less absent in India so far and it’s hard to say why. People who want the benefit of passive investing feel that by creating a SIP in an active mutual fund – you enjoy the same kind of benefit and the past returns show that it has been beneficial as well.

I don’t know whether this trend will change or not but keeping all this data in mind, it is hard to invest all your money in passive index funds.

This post is from the Suggest a Topic page.

This is a guest post by CA Karan Batra, Accounting and Tax Consultant based in New Delhi.

Mutual Fund Charges

We all know that investing in equities through mutual funds is a great option for an individual as mutual funds not only employ professional management but also have experience of investing in equities and are a safer and better bet as compared to directly investing in equities which have an inherent risk element attached with them.

A mutual fund employs highly qualified management, keeps a regular tab on the stock markets, buys and sells equities on our behalf and does everything to ensure that our money is put to best use while ensuring its safety. But what do mutual funds get in return for these services, in other words – how do mutual funds earn?

Many people have this feeling that it doesn’t matter how mutual funds earn till the time our money is growing in mutual funds. But the fact of the matter is that these mutual funds earn through your money only and mutual fund charges are an important factor while deciding whether to invest or not to invest in a specific mutual fund.

Let’s first have a look at the types of fees charged by mutual funds and then I’ll summarize the impact of these charges.

Types of Charges

There are 3 types of fees which are charged by the mutual funds and these are explained below:

1. Entry Load
2. Exit Load
3. Recurring Charges

ENTRY LOAD – DISTRIBUTION EXPENSE

As the name suggests, this fees is charged by mutual funds at the time of investing in the mutual funds. However, this fee does not go into the pockets of the Asset Management Company and is rather paid as distribution fee to the mutual fund agent through which the investor has applied for subscription.

Prior to August 2009, different funds used to pay different amounts as commission to the agent which could sometimes be as high as 2.5% as well. However, in Aug. 2009 SEBI abolished any entry load to be collected by AMC’s to be paid to agents but this didn’t go well within the industry as agents who usually do a lot of marketing and selling on behalf of the company weren’t compensated for their services as a result of which they were not actively working and promoting mutual funds.

Several representations were made by AMC’s in the year 2010 and 2011 to allow them to collect Entry Load as the whole industry was suffering because of this norm and finally in August 2011, SEBI allowed AMC’s to collect Entry Load but limited this fee to a very nominal amount. The maximum fee permissible to be collected as entry load by AMC’s wef August 2011 is as follows

Particulars	Investment Amount	Commission Payable
First Time Investor	Less than Rs. 10,000	Nil
	More than Rs. 10,000	Rs. 150
Existing Investor	Less than Rs. 10,000	Nil
	More than Rs. 10,000	Rs. 100

In case of Systematic Investment Plan (SIP), where the total commitment towards the SIP is more than Rs. 10,000, a transaction charge of Rs. 100 will be levied payable in 4 equal installments starting from the 2^nd to the 5^th installment.

Points to be noted with respect to Entry Load

1. This entry load is payable only in case the investment is made through an agent. In case of direct application being received by the AMC, no entry load is to be collected.
2. This fee has to be properly reported in the mutual fund statement. For e.g. – If you are a first time investor and have made an investment of Rs. 20,000, you would be liable to pay Rs. 150 as entry load and your statement should report all these facts as:

• Gross Investment                                                 20,000
• (Less) Entry Load                                                   __150
• Net Investment                                                        19,850

As the Net Investment received by an AMC is only Rs. 19850, you would be allocated Mutual Fund units for this amount only and not for the whole Rs.20,000

1. Although these charges are collected by the AMC but are payable to the mutual fund agent and you are not liable to pay any other charges to the Mutual Fund Agents.

 

RECURRING CHARGES – EXPENSE RATIO

Recurring Charges are the charges which are collected by the AMC for professional portfolio management services provided to the investors. An AMC employs highly experienced and qualified staff whose prime concern is to take care of your investments and for providing such services the AMC collects fees which is also referred to as Expense Ratio.

There are a number of expenses which are incurred by AMC’s which have been mentioned below:

1. Fund Management Fees	At the discretion of the AMC subject toSEBI Guidelines
2. Marketing/ Selling Expense
3.Audit Fees	Based on Actual Expense
4.Registrar Fees
5.Trustee Fees
6.Custodian Fees

 

Over and above these above stated expenses which are incurred on an annual Basis, AMC’s also incur expense at the time of New Fund Offer. To encourage individuals to invest in a mutual fund, an AMC incurs many onetime marketing expenses at the time of launch of the mutual fund. SEBI has prescribed a maximum ceiling on such expense being 6% of the total net assets and these expenses are amortized over a period of 5 years.

However, SEBI has prescribed the maximum expense that may be charged by the AMC and they are based on the Average Weekly Net Assets of the AMC:-

Average Weekly Net Assets	Percentage Limit
	Equity Scheme	Debt Scheme
First Rs. 100 Crore	2.50%	2.25%
Next Rs. 300 Crore	2.25%	2.00%
Next Rs. 300 Crore	2.00%	1.75%
On the Balance Assets	1.75%	1.50%

 

Assuming that an equity scheme generating 15% returns has net assets of Rs 100 crore, with the operating expense ratio at 2.50%, the effective return would be 12.5% (i.e. 15-2.5). Operating expenses are calculated on an annualized basis and are normally accrued on a daily basis and the NAV so computed is shown after deducting these Recurring Expenses.

EXIT LOAD

These are the charges which are liable to be paid in case an investor exits a fund before a specified time frame.

Mutual Funds have a long term horizon and invest with a long term view. However, if a large number of redemption is applied for within a short period of making the investment, it spoils the total corpus available with the mutual funds as a result of which they may have to make necessary changes to the whole portfolio.

To discourage investors from withdrawing funds within a short period, almost all mutual funds charge exit load of 1-3% based on the time within which an application for redemption is filed. They are usually in brackets of 6 months, 1 year etc. and the lower the time frame – the higher would be the exit load. There is no standard exit load fees charged by these AMC’s and it varies from scheme to scheme and is disclosed in the prospectus of every scheme.

Exit Load is also referred to as Back-End Load and the maximum fees that can be charged by Mutual Funds for premature withdrawal is 7%. However, most Mutual Funds charge exit load in the range of 1-3% depending on the time duration for which the funds were invested.

Mutual Fund Fees as a Deciding Factor

From this discussion it is clear that mutual funds charge recurring fees based on its asset base with the charges getting decreased as the fund corpus increases. Thus as the asset size increases, the expenses charge also decrease which would directly impact the NAV of a mutual fund scheme.

Please note that these are the maximum expense ratios permitted by SEBI and the actual may be a bit lower.

Although these charges keep changing from year to year, note that a difference of 1% expense ratio between 2 funds may turn out to be a difference of 10-15% over a period of 10 years. Moreover, it is also highly advisable to keep an eye on the exit load charged by these AMC’s while comparing two funds as different funds charge different exit loads.

This post was from the Suggest a Topic page.

Mohan posted an excellent comment on the Suggest a Topic page the other day, and I’m reproducing it here.

Dear Manshu,

I read your blog before taking any financial decision and i thank you a lot as your blog has really educated me regarding the various financial products. Thanks a lot for your untiring work . However, of late, i have been thinking and worked out a way / plan for the financial benefits which are likely to be received against my policies , god forbid, if something happens to me during the tenure of these policies. I want some one/ some trusted agency/ to handle any benefits received from my policies and benefits given by my employer/ in a particular manner . Are there any such agencies? if not, what steps should i take to ensure that the funds received are deployed gainfully in fd’s/ MF’s etc, as my wife is a housewife and is not very knowledgable about financial products and she may have to take care of my 2 kids and my old mother.

If I understand this correctly, there are two concerns here – one is how do you ensure that your family gets all due benefits and then the second one is how do you ensure that the money is deployed gainfully.

This is a great thought, and while I hope none of us have to go through such an ordeal it’s wise to prepare for this.

I have never thought of this question deliberately till now so let me pen down my thoughts on how I’d like this to be handled and then I’m sure a lot of you will have great thoughts of your own on this too.

I must admit that no single person knows about all my investments and insurance but I think between my dad and wife – they will know all of them.

So, the first step should be to make sure that both of them know about everything and get a complete picture.

I think that’s the first step, to have someone you trust know about all your investments. If they don’t know about these investments, then there’s not much they can do beyond that.

The most practical way of doing this is create a list somewhere that’s easily accessible and can serve your purpose as well. I have a Google Spreadsheet which has these type of details and since it is a snapshot of what I own at what price – it’s very useful for me and I update it regularly. Sharing such a thing with my wife and dad will take care of the first thing.

The second step is to specify what should be done with each of the investments. So, if there are fixed deposits then let those fixed deposits mature, and if there are shares then sell off all those shares and get cash for them. This is probably a very uncomfortable thing to talk about and quite honestly I don’t see myself bringing up this conversation but it seems to be the right thing to do.

To claim all of this money – you would need paperwork and this brings me back to Bemoneyaware’s post on succession certificates and wills that I shared some time earlier.

Now, let’s come to the heart of the question which is if there is an agency or organization that handles this money on your behalf and which can invest it properly.

I don’t think there is anything like that at all. The closest I can think of is a financial planner, but I don’t think there is someone who specifically does this type of work only.

I think that if someone finds themselves in this unfortunate circumstance – they should go the ultra conservative and simple route of investing all their money in fixed deposits only.

It is easy enough to understand and administer and while there may be other products that give a higher yield – their complexity may make them unwieldy for someone not too familiar with financial products.

The other reason I say this is probably something a lot of you can very easily relate to and that’s the sad reality of the financial landscape.

A lot of people are out to screw you financially and invest your money for their selfish gains and not your benefit. Given that these type of people are a much larger proportion of the adviser / agent community – I feel that the chances to falling prey to one of these people is very high for someone who is not financially savvy and has no one to fall back on. Losing your loved one is a big enough tragedy and compounding that problem by investing precious little resources in crappy products is the worst that can happen to somebody.

In thinking about this I feel that the extra two or three percentages that someone can earn by investing in some other debt instrument is not worth the risk that comes with shopping for such products without having someone savvy to look out for your interests.

These are my thoughts on the subject – what do you think? Have I become too cynical or would you say the same thing?

Reliance Industries Limited (RIL) announced a share buyback plan along with their quarterly results on Friday, and the main thing to remember about that buyback plan is that Reliance Industries is going to execute it through an open offer and buy the shares from the open market.

This means that the company will go and buy the shares from the stock exchange, and there is no way for a shareholder to offer their shares to Reliance Industries and ask them to buy it for a certain price.

The price of Rs. 870 that’s being discussed is the upper limit at which the company will buy shares, and that in no way indicates that the stock price will reach Rs. 870 in the near future or that you can get Rs. 870 for a share any other way.

Over a period of time Reliance will buy its own shares from the market as long as the price is below Rs. 870. If the price rises beyond 870 then they won’t buy any more shares. They are not going to keep buying as long as the price reaches 870 – that’s not their intention at all.

The third aspect of this buyback announcement is the Rs. 10,440 crore upper limit, and this is the maximum the company will spend on the buyback. They are not obligated to spend all of Rs. 10,440 crores, and they will probably not use all of that either. That’s just my guess based on what they did last time and the fact that they have debt worth Rs. 74,503 crores and cash worth Rs. 74,539 crores and they did spend Rs. 1,899 crores on interest payments in the first 9 months of this fiscal so the cash can be used to reduce this debt as well.

I can’t think of anything that’s been announced in this buyback that makes such a material difference so as to start an investment position in Reliance. If you want to speculate for some short term gains then I don’t have any input on that but Business Line has a great article on the currently open buyback offers and they found that out of the 15 offers that are currently open, 14 are much below the maximum price offered by the company, so that gives you an indication of how other offers have recently fared.

PFC and NHAI recently came out with tax free bond issues, and two more companies have filed a draft prospectus with SEBI to issue tax free bonds. These two companies are HUDCO (Housing and Urban Development Corporation) and Indian Railways Finance Corporation.

Although the dates and details are still not out – I thought of making a tax free bond calendar much like the 80CCF infrastructure bond calendar.

The benefit of this type of a calendar is that you can view all the rates and details at one place, and not only use them for future but for past reference as well.

It also gives one place for people to leave comments and ask general questions about tax free bond issues. With that in mind – here is a table with details of past as well as future tax free bond issues.

 

Issuer	Series	Tenor	Interest Rate	Date	Credit Rating	Secured / Unsecured	Issue Size	Min Inv.
REC	1	10 years	8.13%	March 06 2012 – March 12 2012	CRISIL AAACARE AAA FITCH AAA	Secured	Rs. 3000 crores	Rs. 5,000
REC	2	15 years	8.32%	March 06 2012 – March 12 2012	CRISIL AAACARE AAAFitch AAA	Secured	Rs. 3000 crore	Rs. 5,000
Indian Railways	1	 10 years	 8.15%	Jan 27 2012 – Feb 10 2012	CRISIL AAACARE AAA	 Secured	Rs. 6,300 crores	Rs. 10,000
Indian Railways	2	15 years	8.30%	Jan 27 2012 – Feb 10 2012	 CRISIL AAACARE AAA	Secured	 Rs. 6,300 crore	Rs. 10,000
HUDCO	 1	 10 years	 8.22%	 Jan 27 2012 – Feb 10 2012	Fitch AA+CARE AA+	 Secured	Rs. 4684.72 crores	Rs. 10,000
HUDCO	 2	 15 years	 8.35%	 Jan 27 2012 – Feb 10 2012	Fitch AA+CARE AA+	 Secured	 Rs. 4684.72 crores	Rs. 10,000
NHAI	1	10 years	8.20%	Dec 28th2011 -  Jan 11th 2012	CRISIL AAACARE AAA	Secured	Rs. 10,000 crore	Rs. 50,000
NHAI	2	15 years	8.30%	Dec 28th2011 -  Jan 11th 2012	CRISIL AAACARE AAA	Secured	Rs. 10,000 crore	Rs. 50,000
PFC	1	10 years	8.20%	Dec 30th2011 – Jan 16th 2012	CRISIL AAAICRA AAA	Secured	Rs. 4,033 crores	Rs. 10,000
PFC	2	15 years	8.30%	Dec 30th2011 – Jan 16th 2012	CRISIL AAAICRA AAA	Secured	Rs. 4,033 crores	Rs. 10,000

I have taken all the feedback from comments in the 80CCF calendar and increased the number of columns to show more information.

The one thing I’d like to say here is that secured doesn’t mean any kind of guarantee – it simply means that the company has set aside some assets against this bond issue. If anything happens to the company then those assets will be sold to recover the money for the bondholders. That’s all it means – it does not mean a guarantee from the company or the government of India that you will be repaid no matter what.

I’ll have separate posts on the Indian Railways and HUDCO tax free bond issues when their details are announced, and update this table as well.

Like a lot of other things – I came to know about the Reliance Industries (RIL) proposed share buyback program from a comment here.

The details will be out on the 20th but this is a good time to take stock of what a share buyback program entails and what are the things you should look out for.

The first thing is to find out is what type of share buyback offer this will be. As I wrote earlier – there can be two types of share buyback programs – one where the company buys the shares through the stock exchange and the second where they send out a form to their shareholders and ask them to tender their shares for the buyback.

If RIL decides to carry out the buyback program from the stock market then they would indicate a maximum price that they are willing to pay to buy the shares, and carry out purchases from the stock market periodically as long as the share price is below the maximum price they have decided. So, they could say that the company will buy shares as long as the price is below Rs. 1,000. This means that the company is allowed to exercise the buyback as long as the shares are under Rs. 1,000. They could buy it at Rs. 780 or Rs. 900 or any other price as long as it’s below Rs. 1,000.

They will also indicate a maximum amount that they can spend on the buyback but they are not obliged to reach that amount using the buyback. So, they may say that they will spend Rs. 1,000 crores on the buyback but that doesn’t mean they have to necessarily spend the Rs. 1,000 crore on the buyback – they can stop after spending Rs. 500 crore or just Rs. 10 crores.

If Reliance Industries decides to carry out the buyback by asking their shareholders to tender their shares – then they will set up a price at which the shareholders can tender their shares and the company will most probably buy a portion of the shares from the shareholders at this price.

So, in this case the company could say that they will exercise the buyback at Rs. 830 and send you a tender form to see if you’re interested or not. You fill up the form and tell them that you are interested to sell the 100 shares you have but so does everyone else. The company is not looking to completely delist, just buyback a part of its share capital so it will partially accept your tender offer – say buyback 50 of your 100 shares. How many shares they buyback depends on the response to their offer. People who have invested in IPOs can equate this to IPO allotments where you could apply for shares worth Rs. 1 lakh but get only shares worth Rs. 6,000 due to the huge response.

The takeaway from this post should be that you can’t just buy some Reliance shares from the stock market and turn around and sell it to Reliance Industries for a quick buck.

There are many nuances to how a share buyback works and you should familiarize yourself with them so you can ask the rights questions and evaluate the buyback offer yourself.  As more details emerge, I will update this post or write a new one with the methodology they are using as well as the numbers.

You can read these two posts I wrote earlier if you’re interested to know more about buybacks in general.

• Introduction to share buybacks 
• The two types of share buybacks 

IDFC has come up with the second tranche of their infrastructure bonds, and I was a bit surprised to see that they are offering a lower interest rate from the other infrastructure bond issues that are open right now, and even their own earlier tranche 1 interest rates.

The issue is going to open on January 11 2012 and ends on February 25 2012. The issue is secured and rated ICRA AAA and Fitch AAA from ICRA and Fitch respectively.

Here are the other details about the issue.

Options	Series 1	Series 2
Face Value	Rs. 5000	Rs. 5000
Interest Payment	Annual	Cumulative
Tenor	10 years	10 years
Interest Rate	8.70%	8.70% compounded annually
Buyback	5 years	5 years
Maturity Amount	Rs. 5,000	Rs. 11,515

As you see, the interest rate is lower than some of the other issues that are open right now, and given the fact that most of these issues offer the same level of safety and listing benefits etc. – I don’t see a reason to opt for this one against the others that are available right now.

The only new question about infrastructure bonds that I’ve come across since the last time I wrote about them is if either IDBI or LIC is going to come out with an issue in the future.

I’ve not read anything that says they are and I don’t think banks can even issue these bonds, so I wouldn’t wait for these issues.

Another thing to keep in mind is that a few people mistook infrastructure mutual funds as 80CCF bonds and bought them last year. It’s a rare mistake but one that could occur so just something to keep in mind.

Let me begin by answering the question that’s been on your mind the whole week – why do humans have chins? To mate, to chew and a few other theories on why humans have chins.

Next to something that really surprised me – Caterpillar is telling its workers in Canada that they will close down a factory and move to a lower cost location – and what’s that lower cost location? Why USA of course!

It seems that although the wage difference between the two countries is not much, due to higher productivity, pricier dollar, and cheaper fuel – US is a cheaper destination than Canada, and the article lists down many other companies that decided to move out of Canada.

Factories are not the only thing that get affected by exchange rates – this Financial Express article talks about NRIs getting increasingly interested in buying real estate in India due to the depreciating rupee.

Beyond BRICs writes about the capital requirement woes of SBI and how a cash strapped government isn’t able to capitalize SBI beyond the needs of a few quarters.

An incredible story of a Chicago taxi driver who uses Twitter to grow his business.

Flexo of Consumerism Commentary shares his personal balance sheet which gives a view of how he has fared in the last ten years, and what he has achieved in the last ten years is truly amazing.

Finally, some stunning pictures from Iran.

Enjoy your weekend!

The latest company to come up with a 80CCF infrastructure bond issue is Srei Infrastructure Finance Ltd. and their issue opened on 31st December 2011 and will close on January 31 2012.

They have four options to choose from and the bond issue has got a rating of CARE AA from CARE which indicates a high degree of safety.

The main difference in the terms of this bond issue is that the buyback period is 5 years for all 4 options. So, you have two options with a term of 10 years, and then two more with a term of 15 years, but then all of them have an option to exercise buyback at the end of 5 years.

If you look at the REC infrastructure bond issue – you will see that the rate of interest is similar but the 15 year bond issue has a buyback period of 7 years instead of 5. (In the REC issue 10 year bond had 8.95% and 15 year had 9.15%)

Now, the bonds with a 10 year term have a rate of interest of 8.90% and the bonds with a 15 year term have a rate of interest of 9.15% but if you have the option to exercise buyback for all of them at the end of 5 years – then why choose the 10 year option at all?

For someone interested in this bond issue, I think it makes sense to prefer the 15 year series over the 10 year one, take advantage of the extra rate of interest and then exercise buyback at the end of 5 years. The only issue with this is I wasn’t able to find out how exactly the buyback works.

Srei Infrastructure has said in the prospectus that you have to notify them them about the buyback between six and nine months prior to the buyback date but how does one keep a track of these dates?

Do they send out a letter asking you for your preference or what other method does one follow? If they don’t send out a letter then it’s quite likely that a lot of people simply fail to keep track of when to send them the mail about the buyback.

If anyone can offer more clarity on this then please do leave a comment.

Here are some of the other important terms of the Srei infrastructure bonds.

Series	1	2	3	4
Face Value	Rs. 1,000	Rs. 1,000	Rs. 1,000	Rs. 1,000
Interest Payment	Annual	Cumulative	Annual	Cumulative
Interest Rate	8.90%	8.90% compounded annually	9.15%	9.15% compounded annually
Tenor	10 years	10 years	15 years	15 years
Buyback option	5 years	5 years	5 years	5 years
Buyback amount	Rs. 1,000	Rs. 1,531.58	Rs. 1,000	Rs. 1,549.24
Buyback intimation period	The period beginning not more than nine months prior to the Buyback Date and ending not later than six months prior to the Buyback Date	The period beginning not more than nine months prior to the Buyback Date and ending not later than six months prior to the Buyback Date	The period beginning not more than nine months prior to the Buyback Date and ending not later than six months prior to the Buyback Date	The period beginning not more than nine months prior to the Buyback Date and ending not later than six months prior to the Buyback Date

This is not a government company which is a question that inevitably comes up in comments, and this post has the list of all other infrastructure bonds that are currently open.

PFC (Power Finance Corporation) is the latest company to come out with tax free bonds and the terms are exactly the same as the NHAI bond issue.The only two differences that I noticed was that the minimum subscription for the NHAI issue was Rs. 50,000 and for this issue is Rs. 10,000, and these bonds will list only on the BSE while the NHAI issue was going to list on both BSE and the NSE.

Other than that, everything appears to be the same to me.

The issue opens on Friday, December 30th 2011 and will close on January 16th 2011. It is likely that this issue gets over-subscribed quickly because the same thing happened with the NHAI issue that had similar characteristics.

If that happens then the PFC issue will close the issue before the January 16th 2011, so if you are interested in these bonds then subscribe as soon as you possibly can.

The total issue size is Rs. 4,033 crores and while that doesn’t make any difference to individual investors – I want to keep a track of the size of these issues to see how much money flows into them, so that’s the reason for mentioning it here.

Here are some of the other terms of this issue.

Options	Tranche 1 Series I	Tranche 1 Series II
Face Value	Rs. 1,000	Rs. 1,000
Term	10 years	15 years
Interest payment	Annual	Annual
Coupon Rate	8.20%	8.30%

Based on the questions I saw for the NHAI issue – I think a lot of people are confusing the 80CCF infrastructure bonds with these bonds.

So, I want to clarify that these are not infrastructure bonds and they do not come under the 80CCF limit – PFC had issued infrastructure bonds earlier, but they closed for subscription on November 4th 2011. If you came here looking for the Rs. 20,000 additional limit under 80CCF then this is not the instrument for you.

You need to choose one of the open infrastructure bonds from this list.

The next common question is about returns comparing tax free bonds with long term fixed deposits and you can find a very detailed post on that subject here.

I can’t think of anything else with respect to the PFC tax free bonds that I should mention here, so if you have any questions or observations – please leave a comment.