Manju and Sunil Mahajan are regretting the decision to convert their Rs1.35 lakh investment in the erstwhile Unit Trust of India’s Children Gift Growth Fund into the 6.6% tax-free Assured Returns Scheme bonds.
At a time when commercial banks are offering interest rates as high as 9-10% on fixed deposits, and stock markets have been returning even more for the past four years, the Mahajans are earning just 6.6% on their investment. Since the interest is paid every six months, the annual yield on their investment is marginally higher, but that’s small comfort for them, and for investors like them.
To make matters worse, over the past few weeks, the price of these five-year bonds, which are traded on the National Stock Exchange, has fallen below their par value of Rs100. ARS bonds, bearing the tax-free interest rate of 6.6%, and US-64 bonds offering tax-free interest rate of 6.75%, were trading at Rs96.55 and Rs99.32, respectively, on Wednesday.
While prices of the US-64 bonds have gone as high as Rs125 since they started trading in May 2003 is Rs125. The highest level that the ARS bond, which has seen since it began trading in May 2004, is Rs117.
With the rise in interest rates, the market price of these bonds has come down sharply. (There is an inverse relationship between interest rates and the price of debt instruments; when rates fall, the price goes up and vice versa). Today, any investor who wants to exit these bonds will have to book a loss as these bonds were issued at the face value.
Considering UTI’s reach in the hinterland, it is possible that investors in far-flung areas are not even aware that these bonds can be bought or sold at an exchange.
In 2003, as a part of the restructuring at UTI, investors in assured returns schemes such as the Children Gift Growth Fund and the organization’s flagship scheme Unit Scheme-64 were offered two options: They could either redeem their units for cash or they could switch over to these bonds. Several investors opted out but many chose the bond option. Close to Rs8,500 crore worth of US-64 bonds and Rs6,000 crore of ARS bonds were issued, indicating that a large proportion of investors opted for the bonds instead of settling for cash through redemption.
The government had also extended its guarantee (in effect, promising to pay the 6.6% or 6.75% returns in case the Unit Trust couldn’t do so) to these instruments to make them attractive to the investing community.
“At the time, banks were offering around 5-50% on long term deposits and hence we thought that opting for bonds was the most sensible thing to do,” said Manju Mahajan.