Zero Coupon Bonds (Part 6 ) – Planning everything with Zero
Ref: 0909-033A of 5th September, 2009
In earlier part 5, you saw how Zero could build your massive wealth. In this part, you will see many practical application of this wonderful instrument. Before I start, let us have a quiz – what is the figure before “1” and what is the figure after “9”? It is ZERO. The whole life oscillates between these two extremes.
Zero could plan your savings, your future, your Children’s education, their wedding, build property, houses, renovate homes, give start up capital for your adult children, handle unforeseen medical expenses, give you investment capital and finally, divide the wealth within the family during your life time. It also secures your retirement age. Combined with Recurring Deposit accounts, Zero could act as engine with double horse power without even knowing about it.
BUILD UP YOUR MASSIVE SAVINGS:
While Zero involves a lump sum investment, Recurring Deposit permits small installment savings drop by drop. It is said that “an Ocean is built with the collection of millions of tiny drops” I have shown you in Part – 5 how you can secure large and consistent cash flow by deferring maturities year by year. You never have to extend hand before anyone for help. I would avoid the repetition here.
FINANCING FUTURE EDUCATION OF YOUR CHILDREN
Supposing you have two children aged 10 & 8. You are in mid 30s, the best age to have rising income. It usually lasts for 10 to 15 years minimum. The Age 36 is the threshold for almost every one. Now, the higher education years last 3 to 4 years. Following is the plan: (you use combination of Zeros and Recurring Deposits)
- Invest in Zeros like South African Rand bonds maturing in 2017 to 2027. Do not bother about the maturity date as far as 2017 to 2032 – you can sell these bonds at any time. When you are buying today, some one is selling you also. They are investment grade. Say you bought bonds for the year 2017, 2022, 2027 and 2032 investing just 11% to 18% of Face Value. You can buy in multiples of 5000. However, good lot to buy is 250,000 Face value, preferably 500,000 ZAR Face Value.
- Say you bought the highlighted bonds as under. You will be investing from US$ 3685 per 250K Face Value as under:
- Bond Bought : ESKOM 0 32/ER maturing 31/12/2032
- Price: 11.50 (including expenses. The rate will be lower if you buy in 1 Million lot)
- Investment Amount: 250,000 @ 11.50 = ZAR 28,750 = US$ 3,685 (@R7.80/$)
- = Rs 180,200 based on Rs 48.90/$
- The yield may be around 11% or so (I have not actually worked out). Thus, after 10 years, that is, in 2019, the bond may be quoted at R24.15 or about. If 10 years rate on ZAR falls, the bonds may be quoted higher
- When they mature on 2032, when your children are of the age 33 or 31, they will get R250,000 or US$ 32,051 (today rate R7.80/$). I take the view that ZAR will appreciate, but we are ignoring currency potential or risk.
- In India, one can buy NABARD 10 years Zeros having Face Value Rs 20,000 which was issued at Rs 8500 in 2007. It may be trading higher to compensate for 2 years build in interest rate of 9% (that is about 18% higher than Rs 8500 theoretically,. One has to see the actual price on BSE)
Say, you bought 20 bonds having Face Value Rs 400,000, you will get this maturity value, when your Children are 18 years old and wish to go for Engineering or medicine.
FOR WEDDING PURPOSE:
One can buy bonds specially earmarked for special family occasions like wedding. Depending on your needs, you may increase or reduce the size of the bonds. One may also open Recurring Deposit account of Rs 3000 per month for 10 years in lieu of Zeros.
FOR BUSINESS PURPOSES AS SECURITY FOR LOANS
You can buy bonds say, 50 bonds of NABARD bonds having Face Value Rs 10 Lakhs and Investment Value (Rs 4.8 Lakhs). The bond value increases every year by at least 9% to 10%, and if the rates go down, the value may rise by additional 10% to 15%. Instead of giving Rs 10 Lakhs flat deposit as security, you may give the above security at reduced amount of Rs 480,000. On the paper it appears that the bank has security of Rs 10 Lakhs. Your cash outlay is reduced.
BUYING PROPERTY FOR CHILDREN AT LATER AGE
One can reserve the savings especially for Children to buy property after 10 years, (or 20 years for SA Rand Bonds) when they are grown up and have married.
DIVISION OF FAMILY ASSETS WHILE YOU ARE ALIVE
When your family grows with 3 to 4 children, it is possible that dispute may set in especially when they are married, have their own children and wish to separate. When you have only one major property asset, you have to sell it to distribute the wealth.
Say, you have Rs 18 Lakhs to spare for 3 children now. Divide into Rs 6 Lakhs lot for each Child A,B and C. Invest into SA Rand Bonds of DBSA (Development Bank of South Africa). A bond having Face Value ZAR 500,000 will cost you ZAR 90,000 (500k@18%) or USD 11,538 or Rs 564,200 today.
When the A B and C are 18 years older than now, the bonds will mature for payment of ZAR 500,000 or US$ 64,100 @ R7.80/$ or Rs 31.3 Lakhs per child. Yes, Exchange rate will play more important role for increased or reduced return. However, I take the view that ZAR will appreciate from 7.80/$ to 4.30/$ due to progress in South Africa, perceived and consistent weakness in US$ and higher gold, and commodity prices which may enhance the appeal of South Africa. Thus, your children will get anywhere between Rs 25 Lakhs (if exchange rates go against you) to Rs 56 Lakhs per child.
The family wealth could be easily divided without selling core property in which you are living. Your retirement days will be safer even if your children do not take care of you. This is better than even Life policy where you do not see benefits during your lifetime.
In short, every thing can be planned with Zero Coupon Bonds and Recurring Deposits. Depending on where you live, you will have option in same or different currencies. The basic rules are as under:
- Select only Government guaranteed bonds. No corporate bonds for long term.
- Select the long time frame.
- Select the weakest currency having potential for rise (example, SA Rand, Aussie Dollar, Canadian Dollar, Indian Rupees and above all Brazil Real. The giant oil find will catapult Brazil into top sphere.)
- Select the currency that has higher interest rates locked in, such as SA Rand, Brazil Real and Indian Rupee where yield is almost 10%. In other words, you are locking in yield of 10% for 15 to 30 years or more with potential rise in exchange rate in your favor.
- Prepare a note on this bond and keep it with the statement or physical bond certificate to inform your heirs how to handle this instrument, where to sell and how. (When I sold DDB of IDBI and SIDBI, I personally prepared the note for managing this investment in future and asked my customer to retain it with their bonds, so that future generation will know how to handle this investment.
I will be away for about 10 days and will return on 16 Sept, 2009. Until then I will not be able to reply to your comments if any. Please bear with me.
Anil Selarka (Kalidas) PDF Download
Hong Kong, 5th Sept. 2009 (Ref: 0909-033A)
Document Statistics:
Pages 4; Words 1,316; Paragraphs 38; Lines 120
Characters (no spaces) 5,869; Characters (with spaces) 7,165
Link to this page
Dear Sir
This is just a reminder for my earlier post dated on 2nd Nov. I hope you are very busy on other columns but I am very much interested to know the details like where can I buy this zero coupon bond in USA (near by Dallas) if you cant find any broker within AR state.
Thanks for your great Help
Sujatha Ramesh, Chennai, India
Kalidas Says …. Thursday, November 26, 2009
I am trying to figure it out. Any US stockbroker should be able to do that job. I tried Standard Bank (of South Africa – not same as Standard Chartered Bank), New York who have active security department. However, I did not get any reply from their MD to whom the email was addressed.
There used to be Tradebonds.com website which used to deal only in Bonds. However, I am getting error message for that website.
If Morgan Stanley/Royal Bank of Canada (their security arm RBC Dominion Security)/ Merrill Lynch of Bank of America have any branch near your US residence, they should be able to do that. They are also active market maker. Also try with HSBC USA who also have active security department. UBS may also be able to help.
Brokers are the best. I am having my bond portfolio with Charles Schwab but never conducted any trade.
I will contact you by email and also post a message separately here with any useful information that I may have.
SujathaRamesh
24 Nov 09 at 5:53 AM
Dear Kalidasji:
I think my question might be too much to ask but we being newbies esply to the Zero coupon Bonds, (thank god you introduced it to us); Like your recomendation time and price to buy Stocks/shares;
Will you be able to do the same help to all those interested in buying the ZeroCoupon Bonds.. Because knowing the risk of buy these Bonds at wrong time there will be a drastic loss;
As from your article and discussions we understand that South African ZCBonds are best to invest as of today, is it possible for you to send across a message when it is right period/time to go for the Zero Coupon Bonds.
It will be of great help for we newbies, hope you will consider this request and will Alert/advice us with a BUY call
P.S: I have decided to go for the South African bonds using my canadian Canaccord account even it costs more brokerage to be paid to the Canaccord – Sir i am planning to set aside around 5000-8000 USD for these investments hoping to get a chance in the next 4-6months
Please advice
Many Thanks,
Sreeram
UK
Sreeram, UK
4 Nov 09 at 4:49 AM
Dear Sir,
You requested for the City name where my hubby lives and i have shared the details on 26th Oct. Please suggest us in detail on how to get this bond.
One another basic question I have. Will there be too much of yearly charges when we open a new account with any brokers. My maintenance cost should not eat up more cost as we must hold this account till the meturity period of the bond. Please correct me i have misunderstood anything.
Thanks
Sujatha Ramesh,
Chennai, India
Kalidas Says …. Monday, November 02, 2009
I received your details. I am trying to figure out from where you should buy. I had earlier link of http://www.Tradebonds.com which does not work.
When you deal with the brokers, they do not charge you anything. If you deal with some investment banks, they may charge annual fees. Even a company like Charles Schwab does not charge a penny to me.
I will revert to you
SujathaRemesh
2 Nov 09 at 12:14 AM
Dear Kalidasji:
I have an Investment account with canadian Financial (Canaccord Capital) in Vancouver and i approached them and asked if they deal with Zero Coupon Bonds and found they do deal with ZCBonds;
But they said if they have to purhcase oversea’s ZCBonds like SouthAfrican i will be charged extra amount as they will purchase from 3rd party Financials like Canaccord;
But they also have Canadian Government Zero Coupon Bonds but they need to know which Bonds i am interested in, As i am newbie to this, Like South African ESKOM Holdings Ltd, do you know the best Canadian Bonds which i can ask my Advisor if they deal with?
Can you suggest some Canadian Bonds, i also asked them to give me the quotes for the SouthAfrican ZCBonds (taking the risk of extra charge);
Can you please advice on this;
Many Thanks again,
Regards,
Sreeram, UK
Kalidas Says …. Wednesday, October 28, 2009
I suggest South African Rand bonds for two reasons – Yield is high over 10% whereas the currency is relatively weak. When the currency becomes strong, the Government may be forced to lower interest rate which may increase the appel to Rand bonds. One therefore benefits with this double engine growth.
Interest rates in Canada is low to my knowledge. The zero may not be at significant discount like Rand bonds. If the yield in Can$ Zero bond is not over 8%, they are not good enough.
I do not know about Canadian Zero bonds. When I was stockbroker, I could search from bloomberg. Now due to inaccessibility of bloomberg, my information flow is limited. I can not suggest Can$ bonds. Ifyou do want to buy Can$ bonds, go to RBC Dominion Securities, a subsidiary of Royal Bank of Canada. They are big traders and marketmaker of Zero coupon bonds of any currency.
Sreeram, UK
27 Oct 09 at 9:55 AM
Dear Sir,
He works in Bentonville, Arkansas State.
Thanks
Sujatha Ramesh, Chennai, India
SujathaRemesh
26 Oct 09 at 11:37 AM
Dear Sir,
I am interested to invest in South African zero coupon bond and I would like to know how to buy this bond. At present I am located in Chennai and my husband is in US. Please guide us how to open an account (to which broker/bank) and what details we need to ask them before opening up the account. I would be really great if you can point exact broker/bank bank so that we can approach them directly.
Thanks
Sujatha Ramesh
Chennai, India
Kalidas Says …. Monday, October 26, 2009
Which city in US your husband works? I will revert with reply thereafter.
SujathaRemesh
26 Oct 09 at 12:23 AM
Dear Kali Uncle
We are waiting for a long time for your next article. You promised to write about real estate.
Also i find that now a days you are not predicting failure of Banks and institutions in US and meltdown of financial systems all over the world as you used to write in moneycontrol days.
Is the danger over ? can we invest in a big way.
Lolita
Goa
Kalidas Says …. Wednesday, October 21, 2009
I am aware. It will appear soon.
The meltdown has not even restarted. What you see is the sucker’s rally. Almost all companies are showing profits by cost cutting, not by increasing revenue. Further, the major crisis is yet to be played out. It will come when the government is forced to raise the interest rate, that will make the bankrupt US government even more distressed.
No, This is not the time to go in a big way into the market, although it looks very exciting. Do not be carried away by CNBC, and other “First in Business worldwide” channels.
You can play the market like a toy, but toy car is not a real car. Is it?
One can still make money in the market by skilfully operating. Not everyone is blessed with such talents.
lolita
20 Oct 09 at 7:23 AM
Dear Anil,
I have a Singaporean contact who thru’ his contacts around the world deals in BG’s and Sovereign bonds. He has sent me a sovereign bond instrument of very high value issued by central bank of Venezuela to sell to bankers in India. I live in Chennai and have very little knowledge as to whom I should approach as I am quite new to this field. Can you please guide me as to how to go about it? Can you please reply to my email: tgbhaskar@gmail.com
Regards
Bhaskar
Kalidas Says …. Monday, October 19, 2009
Avoid it altogether. US and Venezuela are on warring terms. Do not take chances there. You have tons of opportunities in India alone, why do you want to go all the way there?
Bhaskar
18 Oct 09 at 11:46 PM
Dear Kalidasj,
Just wanted to update you that during the process of opening the account with Interactive Brokers, they confirmed that they do not support buying Zero Coupon Bonds and only support US Treasury Bonds. Just wanted to share it with you and other readers so that they can save some time. I need to find alternative ways to buy the bonds and would appreciate your suggestion on this
Regards
Prabu
Kalidas Says …. Monday, October 19, 2009
you may have to take recourse to other large US, UK or European brokers. Even banks like HSBC may also be help. They do buy Zero coupon bonds, though some brokers may insist on certain minimum. If you can not find the broker, drop that idea. We will find something else.
Prabu
18 Oct 09 at 8:29 AM
Dear Kalidasji,
Would like your guidance on the acquisition of the SAR Bonds you have highlighted.
1. Do i need to have a FCNR Account in India eventually to realise the funds post selling of the Bonds if i acquire it when i’m abroad and had returned to India full time by the time i sell these bonds.
2. As suggested elsewhere, if i buy these bonds thru an Interactive Brokers Account (opened only for this purpose), do i get a document or an electronic receipt confirming my holdings which i can present later when i am ready to sell?
3. Do i need an International Demat account as well to hold these Bonds? As i’ve never invested in International markets, please excuse me if this question sounds too basic but would be thankful to your guidance.
Prabu
Dubai
Kalidas Says …. Friday, October 02, 2009
V. Facilities to returning NRIs/PIO
Returning NRIs/ PIO
* May continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such currency, security or property was acquired, held or owned when resident outside India.
* May open, hold and maintain with an authorised dealer in India a Resident Foreign Currency (RFC) Account to transfer balances held in NRE/FCNR(B) accounts. Proceeds of assets held outside India at the time of return, can be credited to RFC account. The funds in RFC accounts are free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form outside India.
I have an account with Charles Schwab in Hong Kong to whom the bonds were transferred. They send me by mail the statement every quarter detailing my position and current market value (not always accurate)
Prabu
2 Oct 09 at 7:11 AM
Kalidas Sir,
I appreciate your effort to serve us using this website. I am very much impressed with the zero coupon bond article.
Can you answer the below questions regarding bonds
Is the return from the South African bonds tax exempt in south Africa and India?
Are there any restrictions to bring the money back to India?
How to buy these bonds in US?
I am in the mid 30s and looking for other investments too. I have 2 female kids of age 3 and 7. I recently (2 years back) moved from Chennai to United States. I don’t own any property except for a 2400 sqft land in the outskirts of chennai.
I have around 40 lakhs saved in the last 10 years all in the banks. I need your assistance to invest the 40 lakhs.
I am looking at the following investments
1. South African zero coupon bond (12 Lakhs for both of my kids)
2. 12 Lakhs in Shares. (Currently invested 3 lakhs in shares mentioned by you)
3. 5 Lakhs in Gold/Silver ( Hold 200gms of Jewellery)
4. Buy a house in Chennai with the remaining amount as down payment. In Chennai a house costs 60 lakhs to 1 crore. I am not sure whether it is worth buying a house in Chennai. If investing in a house not a good opportunity.
Please advice about the above distribution
Thanks
Nithra
United States
Kalidas Says …. Thursday, October 01, 2009
1. Yes, they are tax free. They are euro International bonds. You are not subject to any taxes either in South Africa or in India (for India, your status is NRI who is not subject to any taxes on investment made outside India)
2. There are no restriction for bringing the funds to India. How the Indian authorities would know the source? When you sell these bonds overseas, the amount will be credited to your account overseas from where you will make normal TT to India as you would for any other savings account.
3. You may be subject to taxes in United States if you are their citizens and if you did disclose this investment. However, by the time you sell these bonds after 10 or 20 years, you may as well be out of United States. Better buy these bonds through some London based non-US broker, so that your holding does not come to the notice of other authorities.
I will advise you further here after a couple of days.
Nithra
17 Sep 09 at 12:03 PM
Sir,
NABARD bonds could not be bought through HDFC online trading used for equities. Could you also explain how do we buy them please?
Thanks.
Muthu Saravanan, Chennai,India, Sep 17, 09.
Muthu Saravanan
17 Sep 09 at 11:47 AM
Sir,
NABARD bonds listing could not be found in the HDFC online Trading. Could you please inform us how to buy the same?
Thanks
Kalidas Says …. Thursday, October 01, 2009
Always keep a private broker having access to BSE than NSE. They usually find the bonds needed by you. Dhotis often do better jobs than blue suits. I may need time to find the information you need.
Muthu Saravanan
17 Sep 09 at 11:45 AM
Hello Sir,
Firstly I must say I am very impressed with your posts and I got so many things to learn (which were not known otherwise). I am thankful to you; your posts changed my entire outlook towards investment.
When I was searching for NABARD bond I came across a website (http://www.maxwealthindia.com/faqs_bonds.asp#7) which says
No,NABARD/NHAI Bonds cannot be offered as security for any loan or advance. This is because instruments under Section 54EC of the Income Tax Act, 1961, cannot be offered as security for a loan.
Do you think they are right?
I request you to please write about buying home Vs Renting, There are thousands of young professionals(I am one of them)who are in this dilemma, the property prices have gone up in recent years yet the easy loans lure us to the liability trap. Your thoughts and advice may help us make a Right decision.
Thanking you again.
Regards,
Brawny M
Kalidas Says …. Thursday, October 01, 2009
While investing into any bonds, read the prospectus issued by the bond issuing authority, in this case, NABARD
Income Tax authorities have nothing to do with the chargeability of any security to any other person or institution for borrowings. If there is a capital market instrument, it is almost 99.9% eligible to be offered as security for borrowings. They are not Non-Transferable instrument. I once discussed this aspect before – quoting NABARD bond issue document.
Wait for my article on Real Estate Investment which may appear in less than 10 days. It will answer many of your queries.
Brawny M
16 Sep 09 at 1:37 AM
hi, Anil
I am impressed your by the in depth knowledge about so many investment options. I am residing in India. I have only heard zero coupon bonds by NABARD. Are there any else? Please let me know.
Thanks
Kalidas Says …. Thursday, October 01, 2009
At the moment none. When the financial crisis deepens, the Zeros will appear on the scene. Until such time, rely on Recurring Deposit investment.
Vikas
14 Sep 09 at 12:23 PM