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Mutual Funds - US64: Finally something interesting

07 Apr 2003

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Investors who had given up any hope of making money on their US64 investments have reason to smile. The government has set the interest rate on US64 bonds at 6.75%, which is a little higher than what we had initially anticipated.

Newspaper reports indicate that the Government has announced a coupon rate of 6.75% on US64 bonds. The rate of interest at 6.75% is compelling as yields on government paper with similar tenure hovers a little below that (i.e. 6.75%). In other words, this is an attractive rate of interest for investors given that there are few administered rate instruments existing at that coupon rate right now.

The reason for the government to announce such a (relatively) high coupon rate on US64, which until now only held unpleasant surprises for the investor, is obvious. The government wants to stem the overwhelming tide of US64 redemptions. And what better way to do that than announce a slightly higher coupon rate vis-à-vis its peers. Never mind if that would be fiscally imprudent! And for good measure, as reports indicate, the US64 bond will have all the features of the popular RBI Relief Bond (the coupon rate on which also stands reduced post-budget). This indicates that like the RBI Relief Bond, US64 units will also be eligible as collateral for loan and transferable. And the government has already announced that the US64 bond will have tax-free returns and tradable in the secondary market.

So should an investor stay invested in US64? Although we have been largely pessimistic about US64 so far, the coupon rate, tax-free returns, tradable in the secondary market, are features that make it an RBI Relief Bond clone, thereby making a compelling case for investment. Whereas the coupon rate is at 6.75%, the yield would be much higher for investors in the highest tax-bracket at 9.6%. Surprising as it may sound, US64 investors finally have a reason to remain invested in the fund.

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