The finance ministry on Monday approved issue of bonds by railways worth Rs 5,000 crore for the financial year ending March 31, 2010.

The bonds will be issued by Indian Railway Finance Corporation (IRFC), which will be tax-free, secured, redeemable and non-convertible, carrying an interest rate in the range of 6.5% to 7.25% per annum. The bonds will be available in the form of public issue.

In another order, the government approved notification of 10 years zero-coupon Bhavishya Nirman Bonds of National Bank of Agriculture and Rural Development (NABARD), again to be issued in this financial year. The number of bonds approved for issue are 95,20,000 with maturity value of Rs 20,000, each having life period of 10 years. Income on such bonds will be taxed only on maturity as capital gain.

IRFC bonds will create a good opportunity for investors in the high tax band. First of all, these are government-guaranteed bonds so there is no chance of default. In fact, in certain term, it is safer than bank deposits.

Besides this, the rates of return offered by the bonds are very attractive. According to a simple calculation, a 6.5% tax free return will be equivalent to 9.28% pre-tax return, which is a very handsome rate.

The highest return offered by five year fixed deposits of bank is around 8%. If one has to pay tax at the rate of 30% of the income, the net interest rate — in case the bane is offering a rate of 8% — would be only 5.6%.

But the other rate at 7.25% offered by the IRFC bond will be even more attractive. The 7.25% tax free return will be equivalent to 10.28% pre tax return. Presently, this is better than investing in debt mutual fund. The average return offered by debt mutual fund in 5 year is 7.75%. The return from the government securities in five year is even less at around 6.4%.

In case of home loans, banks are entitled to mortgage of the property. The mortgage is normally either in the form of equitable mortgage or deposit of title deeds. The mortgage deed is not registered or noted in the records of any revenue authority. As such, the mortgage details are not reflected in revenue records. As a result, the encumbrance certificate issued by a subregistrar will not be able to highlight an existing mortgage. Moreover, the search certificate issued by an advocate won't be able to include this either.

   One of the major reasons behind bad loans in mortgages is cases where a borrower takes a loan from more than one lender using duplicate documents. Sometimes, loans are taken for the same property from different sources, using duplicate documents.

   The National Housing Bank (NHB) and the Credit Information Bureau of India Ltd (CIBIL) have joined hands to set up a central registry of mortgaged houses. Home loan defaults are expected to drop sharply with this move.

   The repository was set up with a database of around six lakhs borrowal accounts compiled from 25 entities commercial banks and housing finance companies - and is expected to help lenders take an informed lending decision. The database accounts for a significant chunk of loan accounts in the country. Presently, the CIBIL database is accessible to only member organisations.

   According to the Reserve Bank of India (RBI) database, there were around 5.7 million borrowal accounts with commercial banks in the country as on March 2009. With the increase in defaults in the housing sector due to duplicate sales deeds etc, CIBIL's mortgage check will enable more informed decisions while assessing new mortgage loan applications as well as better portfolio management. The comprehensive reference database will contain information on properties that owners have availed loans on, summaries of those loans, and open and close dates. The move is a part of the initiative to improve infrastructure in the housing finance market. As the home loan market evolves, there is a need to create appropriate infrastructure.

   The NHB is also pushing for mandatory registration of equitable mortgages. This would increase the cost of home loans as lenders would have to pay a stamp duty which is related to the property value. The stamp duty is in turn recovered from the borrower. The NHB is also working with 10 major banks in the country to set up a central mortgage repository which will have electronic registration of mortgages, and will be mandatory for everybody.

   Now, CIBIL has introduced mortgage check, in association with NHB. The mortgage check will contain information on property mortgaged to various banks, and details of existing loans and comprehensive information on such property. Mortgage check is an electronic database posted on the website of CIBIL.

Authorised persons from member organisations (banks) will be able to access the database to check a property for which loan is applied for. This will help lenders share and access mortgage information and contain bad transactions. In case the details of the property match with the database, the loan application will be declined.

   This will help both the buyer and the lender as it would enable detection of fraudulent transactions.

A2Z Maintenance & Engineering Services (A2Z), in which renowned investor Rakesh Jhunjhunwala holds about 21 per cent stake (on pre-IPO capital), has come out with an IPO to fund its growth plans. While the company is present in some of the promising businesses, lack of experience in new businesses, intense competition, heavy dependence on ongoing capex for future growth, the highly working capital intensive nature of its businesses and expensive IPO pricing need investors' attention.

A2Z's main business includes the EPC (engineering, procurement, construction) work for the power transmission and distribution (T&D) sector from where it drives almost 92 per cent of its revenue. On the back of opportunities in the sector, this segment has clocked athreefold jump in revenue during the last two years. The company has in-house capabilities in the business and enjoys relatively high operating margins. Its strong order book of `1,292 crore, which is more than one time its FY10 revenue, and opportunities in the T&D space should ensure healthy growth in the near future.

Pillars of growth

Apart from the power T&D sector, the company is also working towards growing in other segments. It has ventured into the renewable energy and municipal solid waste management businesses. Both these businesses hold a promising future on the back of large opportunities in India. Through the proceeds of the issue of `675 crore (excluding the `187 crore offer for sale by existing investors), the company intends to invest in these businesses. For instance, in municipal solid waste management, the company has already made significant progress. It has a total capacity of 5,198 tonnes per day and has presence in several cities in UP, MP, Bihar, West Bengal and J&K. In the renewable energy space, the company has plans for about 145 Mw of generation capacity based on different fuels such as sugar bagasse, rice husk and biomass, most of which the company claims it will commission during 2011. The revenue from these two segments is expected to start accruing over the next two years. Also, due to expectations of relatively higher margins (about 45-50 per cent), they will make a larger contribution to A2Z's net profit and overall growth.

Valuations

Infrastructure bonds are the latest avenue for investors looking to park funds in debt instruments. A number of companies have announced plans to raise money through this route. While IFCI has already raised `100 crore, this is the first time after additional tax breaks for investments in infrastructure bonds were announced that an amount over 4,000 crore is being raised. While IDFC and L&T Infrastructure issues are open for subscription, PFC and LIC are the next in line. Here's a snapshot of what these issues have in store for investors.

Tax benefits

Under Section 80CCF, any individual or Hindu undivided family can invest up to `20,000 in infrastructure bonds and avail of tax benefits. This will be over the `1-lakh deduction allowed under Section 80C. So, an investor in the tax bracket of 30 per cent can save an additional `6,000, while those in the lower tax bracket can save `2,000.

Moreover, infrastructure bonds offer stability of fixed returns and are reasonably safe.

How they compare

Other high yielding instruments which help save tax, include employee provident fund (returning 9.5 per cent for financial year 2011), public provident funds (8 per cent) and five-year fixed deposits. PPF gives higher returns that are non-taxable although liquidity is not as good as the bond or a fixed deposit. Unlike PPF and EPF, interest income is taxable for infrastructure bonds. A debt mutual fund gives good returns, don't get any tax breaks and are more risky. According to Value Research, a mutual fund rating agency, debt oriented hybrid funds have returned 10.68 per cent in the last one year. While the returns on EPF and PPF are higher, infrastructure bonds score over instruments like post office schemes which give similar returns but don't have tax benefits. The key benefits for the investors in infrastructure bonds are breaks on the `20,000 additional investment, higher yields and good liquidity.

Liquidity

The infrastructure bonds have a maturity of 10 years but a lock-in period of five years. The investor can ask the issuer to buy back his/her bonds after the lock-in period. Alternatively, the investor can choose to trade these in stock exchanges. Listing is more to do with being more tradeable on exchanges and there may not be any listing gains. Historically, retail bonds trade at par on exchanges. Trading done on exchanges will not be eligible for tax benefits as it will not meet the five-year lock-in requirement. However, investors looking to clock some gains can subscribe to bonds in addition to `20,000 and trade in such excess units. Historically, volumes have been thin in retail bonds trading and we don't expect much trading activity in these bonds.

INTEREST rates are on the upswing in the economy and investors need to be alert about the impact that this will have on their debt mutual fund investments.

One area that investors need to keep an eye out for is that of fixed maturity plans (FMPs) that are being launched by various mutual funds on a regular basis.

These are funds that have a specified maturity date and are close-ended in nature, so investors are aware about the life of the investment at the time of putting their money in it.

In this sense, it is vital that the investors have a clear strategy outlined to consider these funds and here are some features that will be helpful for them.

Popular periods: There are quite a few FMPs that are being launched by mutual fund houses in the market.

A look at several such offering gives a clear idea about the time period that is being chosen by the mutual fund houses for their funds. The time periods include 100 days, 180 days, 370 days and 15 month offerings as many fund houses have come out with these options. The investor has to understand that these will represent the exact time period for which their money will remain with the fund after which the fund will be terminated. The fund with a time period of 370 days ensures that it goes well above 12 months that qualifies it as a long-term capital asset which can be beneficial on the tax front.
Listing: The other important thing that an investor will experience when they are investing into such funds is that after the initial time period for the investment is over there will still be a liquidity option available for them.

Earlier, the investor could redeem the units with the fund by paying a penalty in the form of an exit load.

This is not possible in such funds, since it will not be redeemable till the end of the time period of the fund. To compensate for this, there will be a listing on the stock exchange that the fund will have to undertake and thus this opens up a window for the investor to get their money out.

However, in reality, the actual ability to transact will depend upon the number of transactions that take place. This will have to be witnessed as there are chances that even though there is a route it is not widely used.

Time period: There is also an initial time period for which the subscription is open for investment. This is where the investor has to be careful because they might not have a lot of time available for making the investment. This is especially true as in the case of many FMPs the fund keeps the investment open for only a few days -sometimes only for a couple of days -and hence the investor has to be quick in making the investment.

In some offerings there is a time period of around a week for which the subscription is possible so there is ample time that is available for investments.

No indicative yield: Now the mutual funds and the intermediaries who distribute the funds cannot show or tell investors about the indicative yield that the fund will actually earn.

Earlier, this practice was rampant and this is not possible now. But an investor who wants to have some idea about the kind of return that is being earned there is a way out which is to estimate the returns themselves. Since investors are not experts in the field, these calculations will be just estimates. Also there is no portfolio available for viewing as the funds will be invested only after the issue closes so this route is also not possible.

Though midcap and smallcap stocks are being brutally beaten up on the bourses, Deven Choksey of KR Choksey Securities still feels that there is steam left.

In an interview to CNBC-TV18, Choksey said, "Some of these companies are genuine and I would rather go out and select some of the companies on merit basis."

He suggests buying stocks like IDBI Bank,ICICI Bank and IRB Infra .

"We believe that most of these banks have also got their advance financial solutions (AFS) portfolio mark at 8% so mark to market also is not going to affect them beyond a point. From all this point of view and valuations along with we believe that some of these banks would be definitely good choice though we don't have many selections among the smaller size PSU banks.," he explained.

Here is the verbatim transcript of his comments on CNBC-TV18.

Q: What have you made of the fairly significant falls that we have seen in midcaps and smallcaps this week? Are you tempted to buy or do you think there could be more purging in that space?

A: I think midcaps and smallcaps certainly selectively demands some amount of buying for sure. The issue which has happened is slightly a structural in my viewpoint. What we are seeing is this kind of carnage happening in midcap, smallcaps is largely the fallout of the kind of offloading of stocks by some of the lenders of the promoters who had borrowed this money from them for their use in company or otherwise and that is where the larger amount of fallout is taking place. Why this fallout took place? I think one needs to understand that aspect of it.

The point is that midcaps and smallcaps have never been attracting higher amount of liquidity so the lender would always remain uncomfortable and in a market like this where the enquiries and enquiries would start one after another probably they would not feel comfortable, they would dump the stock so ultimately it triggers higher amount of sale.

What is essentially required at the regulatory level probably is that create a separate exchange for midcap and smallcaps, allow market making within that and probably these issues can get settled but that's a broader issue. In my view some of the names which are getting involved at this point – its not very easy to quantify them saying that they all have been involved in doing some malpractices.

In my view some of these companies are genuine and I would rather go out and select some of the companies on merit basis and buy them of course from the list within I don't have many to talk on anyway but some of the midcap companies because of this particular reason which have come down, they does demand the kind of buying opportunity at current levels.

Q: There has been a correction in the overall market and PSU banks have corrected quite a bit. That's a space that you have liked for a while. What stocks would you be comfortable with at these levels?

A: I think some of the PSU banks are definitely doing well and are likely to do well in current scenario. Fortunately they are not as expensive as State Bank of India kind of bank is trading at 2-2.2 times forward price to book value basis and some of the other banks like IDBI Bank which is trading at less than 1.5 times price to book value basis even if you factor into account the kind of possibility of rise in the interest rate, possibility of some amount of shrinkage into the NIMs of the banks going forward.

But let us also understand that with the higher amount of infrastructure activity continuing and some of these banks participating into it they do get higher amount of fee based income as well in this particular space and that is where we feel more comfortable about likes of IDBI Bank and for that matter even ICICI within the private sector for investment in our portfolio. We believe that most of these banks have also got their advance financial solutions (AFS) portfolio mark at 8% so mark to market also is not going to affect them beyond a point.

From all this point of view and valuations along with we believe that some of these banks would be definitely good choice though we don't have many selections among the smaller size PSU banks.

Q: What about the overall texture of the market, how much more do you think we could correct? Do you think the levels of 5,300-5,400 could be tested as soon as December?

A: I don't know. I think index levels probably expecting, that kind of a sharp correction, may not materialise because if you look at the fabric of the market the likes of ONGC which is coming out with the FPO probably with those kind of tricks that they want to play along with the FPO, likes of for that matter Reliance which is unlikely to fall given the kind of USD 90 per bbl crude oil prices and likes of Infosys which would remain in safe haven for most of the people to park their funds.

So if they end up supporting the market then possibly you may not see a large cut into the indices. What is more worrisome is the large cut happening in some of these stocks which are going down very significantly and that includes some of the banking names also, that is little bit more worrisome. I do not see market falling that sharply and probably I would believe that 5,750-5,800 kind of levels definitely support the market.

Today at least I believe that the market should have some amount of bounce back effect from yesterday and day before yesterday's fall. I don't think there is too much of a fall. I think one can expect on the situation.

Q: Many of the stocks from the infrastructure basket saw a significant amount of correction; the likes of HCC, GMR Infra even IRB Infra that's been tainted to some extent. Is there anything from that space that looks attractive from a medium-term perspective?

A: Yes, to be counting on safer side we like companies like IRB, ITNL which is IL&FS Infrastructure who are basically engaged into road model and the collection of toll as well as BoT projects.

I think both these companies are very well set as far as their execution spree is concerned probably they are also not as much troubled by many of other infrastructure companies like HCC are concerned on the environmental clearance etc though they may have the tendency of delaying the projects because of non-clearance come in but road sector is not finding as much kind of a resistance coming from any corner.

So from that point of view IRB and ITNL kind of a company could be a better choice to have in the portfolio and would these companies are available too at reasonably attractive valuations so from that point of view one can certainly look at both of them adding into the portfolio.

Q: How do you see the rest of the December series panning out? Do you think we will still hold a tight range of 5,800 to 6,100 and not see a big December in that sense?

A: Most likely. It's going to be around this week maybe 5,800-6,100 or 5,900-6,200. It's a subject, which we cannot predict, but more importantly what was expected out of this particular months and that's what something which one would look forward to is that the inflow starts coming back into the market. Now when you look at the broader perspective the inflows are unlikely to come back in hurry, more because the structural issue that the European levels are still not settled and as a result of this people are not predicting or not confident about dollar movement either and that is the reason for which that keeping tight on bringing that kind of a money to the market.

Of course the domestic sentiments got affected because of the recent past history but the fact is that people are still clear about it that India story continue and these are some of hurdles which one will have to face when the growth happens in this country. So the money is expected to come which is not yet seen coming in and that is where one is not feeling comfortable predicting the Nifty at this point of time.

Yes, I would bet on it that it would remain range bound between 5,900-6,200 levels. I think with the improvement in the liquidity certainly one can look forward to the higher levels.