The Ultimate Breakdown Of Infrastructure Bonds
Infrastructural development is crucial in the nation-building process. Airports and roads are more than simple concrete constructions. They are the engines of economic expansion.
Infrastructural development is enhancing in India. The infrastructure sector in India is estimated to reach USD 353.11 billion1 by 2030. The government is investing in India’s infrastructure by allocating 3.3%2 of GDP to the sector in 2024. Moreover, the national highway network grew by 60%3 from 2014 to 2024. High-speed corridors in India are also expected to reach 4,827 km4 by 2025.
This growth has led to a thriving infrastructure financing market as well. Infrastructure bonds are a tax-efficient method of infrastructure financing.
What Are Infrastructure Bonds?
The debt security that allows an organisation to borrow money from investors is a bond. Infrastructure bonds allow issuers to issue funds solely for infrastructural projects.
The foundation of any functioning economy is the development of infrastructure. Massive amounts of money are frequently needed to finance these enormous projects. Infrastructure bonds enable companies to raise capital without diluting equity.
Benefits Of Investing In Infrastructure Bonds
The following are the advantages of investing in Infrastructure bonds.
1. Stable Returns
Bonds are debt securities and hence they give investors a consistent return. Yields would differ from issuer to issuer. These fixed-income securities provide a great investment avenue for risk-averse individuals.
2. Long-Term Investment
These bonds are perfect for long-term investors who want portfolio diversification. They typically have maturities between 10 and 15 years5. Investors have the option to sell them after a specified tenure if they are listed.
3. Portfolio Diversification
Infrastructure bonds are not susceptible to market volatility due to their fixed-income generation. Investors can balance the risk of their portfolio by adding these bonds. This diversification diminishes the effect of market volatility.
4. Contributor To Economic Growth
Infrastructure bonds finance the infrastructural development. Other prospects of economic prosperity like trade and commerce are directly or indirectly impacted by the infrastructure.
Risks Associated With Infrastructure Bonds
Every asset class has risks and infrastructure bonds are no exception. There are some risks associated with an investment in infrastructure bonds as well. Some of these risks are listed below.
1. Interest Rate Risk
Interest rate fluctuations have an impact on the value of infrastructure bonds. Interest rate and bond value move are inversely related. The illustration below may help understand the correlation between the two.
When the market interest rate increases, the new bonds give high interest. Old bonds become less attractive to investors and their market value falls. The opposite happens when the market interest rate falls. The illustration below explains the phenomenon.
2. Liquidity Risk
Infrastructure bonds have a maturity period of 10 to 15 years. Therefore, they do not provide liquidity of funds to investors.
3. Credit Risk
Infrastructure bonds are debt securities without any collateral. Therefore, there is a pertinent credit risk in this bond investment. Credit risk involves the bond issuer’s inability to reimburse investors for their principal and interest.
Tax Implications Of Infrastructure Bonds
Investors in government-approved infrastructure bonds can benefit from tax savings under Section 80CCF6. A deduction equal to the amount invested but up to INR 20,000 in an assessment year is deductible under this provision.
1. Government-Approved Infrastructure Funds
Many Public Sector Undertakings (PSUs) like SBI, private banks and NBFCs issue infra-bonds. Some bonds that qualify for an 80CCF deduction are as follows.
- Integrated Infrastructure Finance Company Limited
- Industrial Financial Corporation of India
- Life Insurance Corporation
2. Other Governing Factors
There are a few other parameters that decide the applicability of infrastructure bonds. Some of these parameters are listed below.
- The bond's duration must be at least 10 years7, with a five-year lock-in term.
- It might be in Demat or physical form.
- These bonds' interest is taxable and has to be included in the taxable income.
How To Invest In Infrastructure Bonds?
Banks might issue more than INR 1 trillion8 in infrastructure bonds during FY25. ICRA9 also states that public sector banks will hold 82-85% of the total infrastructure bonds issued.
The graph below shows the expected pattern of bond issuance by banks.
Tier 1 and tier 2 are different kinds of assets that banks must hold. However, the key takeaway from the graph is the rising dominance of infrastructure bonds in upcoming years.
Given the rising popularity of these bonds, investors must follow the steps listed below to make investments through this asset.
1. Demat Account
Firstly, individuals should get a demat account with a registered depository. This will hold bonds in dematerialised or electronic form. Bond transactions will be performed through these accounts.
2. Choice Of Bonds
Investors may purchase freshly issued bonds in the primary market. Notices are often laid out in newspapers, stock exchange portals and company websites. Investors may also invest in pre-existing stocks from the secondary market. All investors must choose a bond that best suits their financial goals and requirements.
3. Application
Investors may apply for bonds online or offline. The online application requires demat account details and PAN. A few other documents might be required as well.
The offline application provides physical certificates. It requires some additional documents, like residential proof.
Conclusion
In the current market environment, the infrastructure bond industry is expanding gradually. For investors with a low-risk tolerance, they are advantageous. They provide decent returns at comparatively lower risks. They provide returns in the form of interest irrespective of market fluctuations. However, market fluctuation of rates causes a fall in the value of these investments. Investors can be a part of the Indian growth story with infrastructure bonds. Investors must be careful and perform due diligence before investing in any infrastructure bond.
The growing infrastructure and the infra-bond market have provided a great portfolio diversification opportunity. Log in to Grip Invest and start your investing journey today!
Frequently Asked Questions On Infrastructure Bonds
1. What projects are financed by infrastructure bonds?
Financial instruments called infrastructure bonds are used to finance long-term infrastructure projects. These projects may involve building and maintaining ports, railroads, roads, and utilities. It can additionally be employed in transmission, distribution, and power generation.
2. Are there any tax benefits associated with infrastructure bonds?
Section 80CCF offers tax benefits to investors in infrastructure bonds. The bonds must be approved by the government. This provision allows for a deduction of up to INR 20,000 in a given assessment year. With a five-year lock-in period, the bond's length must be at least ten years. Additionally, interest must be included in the taxable income.
3. How does interest rate fluctuation impact infrastructure bonds?
There is a correlation between interest rates and bond value. When the interest rate of new bonds increases, the bond becomes less attractive. The market value of the bond falls. A fall in market interest rate makes the bond more lucrative. Thus, the value of the bond falls.
Reference:
1. India Brand Equity Foundation, accessed from: https://www.ibef.org/industry/infrastructure-sector-india#:~:text=The%20infrastructure%20sector%20is%20a,%2C%20and%20water%2C%20and%20irrigation.
2. Invest India, accessed from: https://www.investindia.gov.in/blogs/indias-push-infrastructure-development#:~:text=The%20government's%20commitment%20is%20evident,Railways%20and%20Urban%20Public%20Transport.
3. Press Information Bureau, accessed from: https://pib.gov.in/PressNoteDetails.aspx?NoteId=151870&ModuleId=3
4. Financial Express, accessed from: https://www.financialexpress.com/business/roadways-from-delhi-mumbai-to-bengaluru-chennai-indias-major-expressways-set-for-completion-in-2025-3705548/
5. Business Standard, accessed from: https://www.business-standard.com/finance/personal-finance/sbi-s-rs-100-billion-infra-bonds-is-it-a-worthy-investment-123080100273_1.html
6. Income Tax Department, Government of India, accessed from: https://incometaxindia.gov.in/_layouts/15/dit/Pages/viewer.aspx?grp=Act&cname=CMSID&cval=102120000000078878&searchFilter=&k=
7. Business Today, accessed from: https://www.businesstoday.in/magazine/tax/story/infra-bonds-may-not-be-good-choice-of-investment-for-all-20129-2011-02-24
8. Business Standard, accessed from: https://www.business-standard.com/finance/news/infra-bond-issuances-by-banks-set-to-surpass-rs-1-trillion-in-fy25-124112601083_1.html
9. ICRA, accessed from: https://www.icra.in/CommonService/OpenMediaS3?Key=6e896184-6fc6-4cbf-9f81-4855fd5d489a
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