how far apple can take you

Apple is worth $744 b now; just 34.41% away from becoming a $ trillion company. Next in line are Google at $588 b; Microsoft at $502 b; Berkshire Hathaway at $447 b; Amazon at $408 b; and Facebook at $400 b. Since Apple is already 27% ahead of Google in the run, we can assume that it could the first company to hit the $ trillion. Much credit goes to Buffett and Munger for not falling behind the technology companies in today's times.

The discussion is on Apple; so let me stick to that. The question is whether Apple would make sense for an investor at its current price.

The business
For the year ended September 2016, Apple had revenues of $215 b, on which it earned $45 b for its shareholders.

Over 60% of its revenues come from one product, iPhone.

Units are in thousands:

The key for this business is growth. Can its revenues, operating profits, and free cash flows grow at a meaningful rate in future? The law of large numbers is impending, although it enjoyed extraordinary growth in the past decade. Where can it possibly sell more?

Of course, the return for the investor is directly based upon its growth rate. iPhones are not going to be changed every year, although certain geeks engage in doing just that. iPhones, iPads, and Mac are not cheap. Growth in China and India is some possibility; yet, there is enough competition in the emerging markets. Fighting the price war is not going to be easy. Average price of iPhone is $645, iPad $452, and Mac $1,235. A large base and high price are a serious impediment to the growth story.

In the current interest rate scene, 10-year treasury is yielding 2.48%, and 30-year treasury, 3.07%. For an investor then the choices are: pick treasury at these rates, or look for something that is higher than that. I am not checking real properties, or high-yield bonds; that is a separate business. So let's stick to equities in the public market. And I am not going to calculate the cost of equity to precision with the academic formula.

I reckon, any rate that is higher than 3% should be sufficient, unless the investor is predicting higher interest rates. Even then how much higher? We can add an equity risk premium of say, 5 points to get to an expected rate of return of 8%.

Apple is a weird business. It is currently earning ridiculous amount of cash on virtually insignificant capital. It had $237 b of cash from $128 b equity and $87 b debt. That amounts to a negative operating capital employed. Yeah, it is a weird business.

The intrinsic value
In order to estimate intrinsic value of Apple, obviously, we cannot assume that such weirdness should continue. We have to assume that Apple will have to reinvest in order for it go grow. So there are assumptions regarding the revenue growth rates in the next decade, and beyond that, there is a cap on the growth rate until perpetuity. How much the revenues would be say, in a decade, $325 b? Tim Cook has a story, and so do you and I.

Apple has shown remarkable improvement in operating margins from 12.70% in 2006 to 27.84% in 2016, all thanks to the brand iPhone. Net margins gained from 10.30% in 2006 to 21.19% in 2016. Again, return on equity increased from 19.92% to 38.28%. For the reasons mentioned earlier, it is not meaningful to calculate return of capital. However, we cannot expect these margins and returns to improve any further or even remain unchanged in future. Apple has become truly large to sustain further improvements is a reasonable assumption. How far down will these be in a decade is anybody's guess. Are 20% operating margin and 15% return on capital until perpetuity defendable? Time, not Tim, should tell us.

As a consequence of higher reinvestment rate, lower growth rate, lower margins, and lower return on capital assumptions, Apple's free cash flows to firm should also be lower in the coming decade. How about $37-40 b for the stable business growth?

Based upon its intrinsic value calculated considering a myriad assumptions, Apple might even be successful in giving the investor a 7.50% return at its current price. However, following it has its pitfalls.

Perpetual cash flows
We can even assume that Apple has already matured, and can value it on a perpetuity basis. At $40 b of free cash flows growing moderately forever, I see that the rate of return to the investor based on its current price is about 7%.

The pricing effect
Pricing is relatively easier. Apple had an EPS of $8.31 in 2016, which grew 16% (in 5 years) and 38% (in 10 years) annually; exceptional. From now on, though, there would be bumps on the road; but how high to obstruct growth? At 5% annual growth, its EPS in 2026 should be $13.50. Apple has been trading at an average high PE of about 15, and a low PE of say, 10 in the last five years. If we mark its high of 15, its estimated price will be $202.50 in 2026. That is a return of 3.78%.

Then there dividends. If we assume that Apple will fall short of innovation and moves to return much of its cash back to the shareholders, and further assume that $200 b of cash, net of repatriation taxes, will be used up in the next ten years, the dividend per share should be $5.40 at year 10 without any equity dilution. The aggregate investment return (price appreciation and dividends) will then be just about 6%.

If we assume that Apple realizes its size and acknowledges that it can no longer innovate, and further assume that, consequently, it chooses to distribute all cash back to the shareholders, at $435 b of cash return during the decade, the aggregate investment return will be about 8.60%. At this rate, the dividend per share should be $10.40 at year 10 without any equity dilution.

This assumption also has its perils; the market might mark its PE down to lower levels; and Apple may not be able to generate another $200 b cash in the next ten years. Just imagine a return of $435 b of cash in dividends! That would be a voodoo. That would even be the end of story.

Buybacks
Apple could expedite share buybacks. $200 b can be used up to buyback 1.3 m shares from its shareholders. Sure, it would trigger market pricing if done at one go. Nevertheless, that should leave approximately 4 m shares outstanding. This should have an immediate effect of increasing EPS to $11. If this grows at 5% annually, EPS in 2026 would be $17.91. The estimated price at 15 PE will be $268 in 2026. That is a return of 6.72%. With increased dividends, the annual return could be in the region of 9%; much better.

All this assumes that Apple will be able to retain its existing earning power. Yet, is 9% a cap on Apple's returns for the investor?

The benefactor
Warren Buffett has been piling up on the Apple stock. That should say all is well for its business. Is that so? Buffett has also been piling up on the airlines stock. Yeah, that is the same person who said, if a capitalist had been present at Kitty Hawk in the early 1900s, he should have shot down Orville Wright. Yeah, the same airlines that grow rapidly, require significant capital to grow, and earn little or no money.  Yet, Berkshire's purchases have been like there is no other time. This time there is no 800 number to dial either.

Never mind, Buffett bought 61 m shares of Apple for $6.75 b as of December 2016; that is about $110 per share.

Subsequently, he also bought more shares of Apple, because he liked it.

These 133 million shares might have cost him at least $15 b, which makes the average price per share at about $113.

Well, these are worth over $18 b now; so he has already earned book profits of $3.5 b. The Buffett factor is also imminent in the market.

So what is it that he saw in Apple now that he did not see before? From a technology-hater to the 2.50% owner of a technology company, sure, there must be something. One could be the law of large numbers staring at him.

But here's the bizarre reason that he chose to give; some enlightenment I suppose.

Of course, the product is sticky; otherwise it would not have enjoyed the growth rate that it reported. It has been there since 2007, when iPhone was first launched. Granted, 2007 was too early to feel the stickiness; but, last five years would have told something.

Even Microsoft's windows and office have been sticky products since a long time. What stopped him from buying its stock, conflicts of interest due to friendship?

The enterprising Apple
What else Apple could do to please its shareholders? With $200 b cash and growing, it can create an investment portfolio with some high-quality stocks. It can acquire certain high-growth companies. There is no other business, presently, in the world that matches cash generating capacity that Apple has. That cash has to be employed such that its shareholders get a meaningful rate of return. Tesla is selling at $40 b; What about some of Google and Facebook? A diversified portfolio of high-growth technology, and high-quality stable business stocks, and some of the index itself will not be a bad idea. Then Apple will have two divisions, iPhones, etc. and company, and investments business. Tim Cook will have to look for a worthy capital allocator.

The trillion
If the $ trillion is what matters, here's what it takes Apple to reach it.

While irrationality knows no bounds, Apple is a 7.50% return stock. That's not bad considering the alternative opportunities available at this time. But, even the broader markets are capable of delivering that return, give or take some points. That leaves us to choose between a low-cost S&P-500 index fund and say, Apple. A comfortable, low stress market return, or an exciting Apple return.

That is the question.

$M, not too difficult in US for the average

The median income in the US in 2015 was $55,775; there are places where it is more than that. 

It is also true that average Americans cannot save enough to fund their retirement. This is why they also end up working in places otherwise they would not have liked to. This is also why they are sort of forced to take up work for longer years than they would have otherwise liked to. What a life! Even a masochist wouldn't like it. 

Someone said it long ago: Twenty years from now you will be more disappointed by the things that you did not do than those you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore, dream, discover. 

It is an apt statement. Life is too short to stick to the comfort zones. Nevertheless, it is not very difficult to come out of it; neither does it take too long. The key is to become financially independent. Note that it is not being rich, which is actually relative. Someone with $500 k is richer than the one with $100 k; one with $1 b is richer than the one with $100 m. Talking in terms of the rich is not only useless, but also stupid. 

What we need to attain is financial independence. It is always measured in terms of how much cash one has compared to one's expenses. The higher the multiple, the higher the assurance. Someone with $100 k in financial assets and annual expenses of $10 k is wealthier than someone with $500 k assets and annual expenses of $250 k. To become truly financially independent, one needs to increase the multiple. 

There are only two ways to achieve an early financial independence: Increase income compared to expenses, or Decrease expenses compared to income. For most, it is much easier to do the latter; yet, they do not realize it. For them, life is to enjoy the moments on splurge. Little do they know that there is plenty of fun in delayed gratification. 

So how does an average person, employed with an average salary, become financially independent? If the two conditions are fulfilled, it is not very difficult: One, restrain; control; and behave. Two, invest savings in equities, preferably, in the S&P-500 index fund. 

In January 2000, S&P-500 was at 1394.46; in December 2016, it was at 2238.83. A 2.82% annual return over 17 years is no fun. Yet, the average employee could have become a millionaire by that time. 

It is because the markets are inefficient. They fumble on occasions; act irrationally at times. That's how they provide opportunities to the average employee. In February 2001, the index fell over 9% from the January 2001 value. 

Sure one could have bought in March 2001 and sold in April 2001; again bought in October 2001 and sold in November 2001; and so on. But we are talking about the average employee. In fact, here, we should be talking about everyone. It is very difficult to time the market on a consistent basis. Let's keep that story for another day. 

I am going to talk about the average 25-year old couple earning a combined salary of say, $50,000. Not very unlikely for the average. They are ordinary individuals, engaged in ordinary employment. How could they become financially independent? As we noted, it is easier to cut expenses than to increase income. 

If the couple saved and invested $2000 per month, which is $24,000 annually, in a low-cost S&P-500 index fund from January 2000 until December 2016, the total investment would be $408,000. Another way to see it is to keep one salary for living costs, and invest the other; there is not much excuse. Remember the buzz words: restrain; control; behave. It's possible. The investment value would be $707,000 as of December 2016 before the fund expenses, which are not too high in a low-cost fund. So the couple would be worth $707 k at age 42. The annual return changes from the paltry 2.82% to a more reasonable just over 6% due to the dollar-cost averaging, which happens thanks to the market inefficiencies. I have not included dividends, which if reinvested, should increase returns. 

They might say, the salaries weren't that much in 2000. It turns out that the numbers are not far off. If the investment was increased by 5% annually reaching $4600 per month in 2016, the investment value would be just over $1 m; not too bad. $4600 per month translates to $55,200 annually, which is the median salary anyway.

The losers might talk about taxes, etc. Remember, though, we are talking about creating enough wealth for the ordinary individuals early so that they too can let go of their shackles, and explore life. This is to show that it is very much possible for the average. The trade-off is clear: work for someone for life, or call your own shots after 15 years.

Their behavior is more important than income they earn. Cut costs relentlessly, and invest every month irrespective of the index value. After 17 years, at age 42, the couple could have $1 m in financial assets, which would also give quarterly dividends.

With $1 m plus financial assets, the average couple could move to a place where home and living costs are much cheaper, and have a fun-filled life. Why do they have to care to work for another unless of course they actually do love it? There is a superior life outside of the Bay Area and Wall Street too; and it can be more purposeful.

And now for the not-so-ordinary. If the couple can save $5000 per month, the investment would be worth $1.7 m. There are plenty of households whose annual income is $120 k. $5000 per month with 2% annual increases, i.e. $7000 per month starting 2016, would turn into investments worth $2 m.

Again, they might talk about the hindsight bias: where're the future returns?; Europe and Japan are already down; China is on the way; the US is not going to be an exception. Heck, these are the people who don't want to give up on the status car, large TV, expensive cell phone, fancy gadget, and those regular $5 coffee twice a day. If only they learn to defer their gratification, they would have to work, without choice, for only a maximum of 15 years.

But, heck no; human behavior has reasons that reason cannot understand.

buyback paradox at Infosys

Former CFOs of Infosys, who are also major shareholders, are seeking buyback from Infosys board in order to ensure proper use of its cash. They are right in questioning its capital allocation policies. 

That said, whether Infosys should initiate a buyback is a tricky matter. For a buyback to make sense, two conditions should be met. 

First, the firm should have excess cash. The business should be in a position to generate cash in excess of its reinvestment requirements. That happens when growth slows down, and it becomes a mature business. It looks like Infosys does have excess cash; it had Rs.345 b as of March 2016. This cash becomes free cash flow to equity investors if it cannot be used for working capital, capital expenditures, or acquisitions. The Infosys board should first assess whether it is the case; recall the CEO's grand plans for 2020. 

Second, the stock price should be lower than its intrinsic value. The value changes based upon the perception of the analyst though.

Price > Value: The former CFO considers that the stock price is expected to be lower, and consequently, generating lower returns to the shareholders; this is when the stock price is higher than its value. If the board agrees with this analysis, but carries out a buyback, which is usually at a premium to the market price, it would mean that cash is being used for a stock that had no growth prospects. This would bring down the value of Infosys as a business because of the purchase of an expensive stock. Any buyback of the stock would hurt the remaining shareholders, and therefore is not good for the firm. 

A better option for the CFO would be to sell the (expensive) stock at market price, and exit as a shareholder. Invest the proceeds in opportunities yielding higher returns. This will be good for the exiting shareholders, remaining shareholders, and the business itself.

Value > Price: If the board does not agree with the CFO's analysis, and considers that value of the stock is higher than its market price, the buyback makes sense. There is excess cash, and the stock price is cheap compared to its value. If the board carries out the buyback, the exiting shareholders (the CFO and company) would be worse off. This is because the stock having prospects of higher returns is exchanged for cash by the exiting shareholder. This would no doubt help the remaining shareholders; and that is the whole purpose behind a firm undertaking stock buybacks. 

A better option for the CFO then would be not to sell the cheaper stock back to the firm. Stay invested when the value is higher than price.

Whoever is right in assessing the value of the business will be the winner in this game. Heck, isn't this the case in any investment game?

Stock buybacks after all are dividend decisions. When there is excess cash, and assessing value of stock is difficult (if so the managers are not fit to run the business is another story), there is a much better option for the board. Payout higher cash dividends; even normal payouts accompanied by a onetime special dividend will be good.

Dividends are good!

infosys: shareholder value

Infosys is currently in news. This time it is up against its founding shareholders. They are questioning corporate governance at the company. 

After October 2014, when the founding shareholders left the company voluntarily, its affairs were handed over to the outsiders. The shareholders showed faith in the new professionals in running the company in a diligent, transparent and professional manner. The expectation was also that the new board and management will increase the shareholder value over time. 

As noted by them, after their departure, the founding shareholders did not interfere in either strategy or direction. 

There was no question of interference from any of the founding shareholders. Then there was this sloppy headline at the economic times:

However, when you click open the headline, this is what you get to read:

However, the headline coolly puts words in Pai's mouth to blame Murthy for the fiasco. It is evident from the article itself that Pai never said anything of that sort. We wonder why not do some clean reporting. In fact, Pai has backed founders in raising corporate governance issues at Infosys. 

Making significant severance payments to departing employees was not called for in the best interests of the company and its shareholders. This was the first crack. Furthermore, remuneration of the CEO not commensurate with the value being created was also questioned; the second. The remuneration committee is primarily responsible for it. 

With responsibility, there comes defense, which is human nature. Yet, not disclosing such a serious matter (excessive severance pay) in the annual financial statements was a serious breach of corporate governance. How could the audit committee overlook such an important matter?

Of course, the board is collectively responsible for this mess. 

And of course, it is a joke to bring in a legal firm to deal with the founders. 

The founding shareholders own over 12% of the business. It is only fair that their queries are addressed in a manner that is transparent and professional. The fact that their opinions are out in the open reflects how they are being treated by the board. 

I am surprised that Oppenheimer Funds, which owns 2.40% of Infosys, is not in line with the other large shareholders. What the founding shareholders have said, and what response Oppenheimer has given is another joke. The fund needs to know the difference between corporate governance and business strategy and plan. They are two different things, although one would expect the managers to have strategy that is not in fight with corporate governance. 

Of course, Infosys is the business of its shareholders. So what it is publicly listed? A 12% shareholder is a significant shareholder, not an apathetic animal in captivity.

Let's come to the management performance. Vishal Sikka took over in June 2014.

Infosys has done reasonably well in the past five years. Both operating profits and earnings have increased on a per share basis. Yet, the market value has not moved much from 2011 high.

Pai is not off-mark when he said:

It looks like the past performance was not satisfactory for the market. Clearly, market expectations are low with respect to its future performance; growth rates have reduced, and both automation and global, especially the US, trends are expected to drive down growth rates further.

Nevertheless, Sikka has grand plans for the business.

For 2016, the revenues were $9.46 b (Rs.624 b), and operating margin was 25.39%. If these targets are achieved, operating profits would be $6 b in 2020; in rupee terms, the value will depend upon the expected exchange rate. At Rs.70, the operating profits would be Rs.420 b as against Rs.158 b in 2016. Infosys was priced at a high of 17.80x EBIT and a low of 13.44x in 2016. If we take the lower value of 13x, Infosys could be priced at Rs.5460 b in 2020, which is only 3 years away. For the investor at the current price of Rs.2224 b, the annual rate of return would be close to 35%; phenomenal, assuming no dilution in equity. Any one interested?

As for the intrinsic value, I am not brave enough to do it as there are too many variables related to the future, which I am not capable of dealing with.

demonetization of property and gold

There is still talk of demonetization; some in favor and some not. Cracking down on corruption and black money is a good idea. Whether demonetization will bring about the required change remains to be seen. That said, Indians no longer hoard most of their cash in the form of cash; both storage and security issues have caused them towards property and gold; of course, they were always the conduit. Yet, the proportion representing hard cash has significantly reduced, and that representing property and gold has significantly increased.  

So property and gold it is for the Indians. How to deal with that pretax cash diverted to land, building, and gold? Asking them to use aftertax cash rather than pretax is not useful; remember, it has not worked. Will asking them not to pay tax on capital gains work? I don't think it is a good idea. 

Why should people who deal in property and gold be treated differently from to say, a business owner? It would be like if you start a business, profits will be taxed. If you buy and sell either property or gold, profits will be exempt. Little funny, wouldn't it be? 

Investing is a serious business, whether in equities, debt, property or precious metals. The intention is to make profits out of the transaction; so that should make it a business. And it is a business, not any different, even for those who transact occasionally. When a home buyer for primary residence sells it after a decade or so, profits made are investment profits, albeit long term. 

Lack of regulation and bad intent of people have been the cause of this massive hoarding of black money in the form of property and gold. Crackdown on this is really important.

I haven't got nice things to say about gold; but have four suggestions, though. One of the best ways to stop corruption in gold is to tax it heavily; make it more expensive. It would also be additional income for the government. If people still want to buy gold, so be it. Second, every transaction on gold should be based on the PAN of the buyer; No PAN, no transaction. Third, increase the tax rate on capital gains. The idea is to pay heavy penalty by those who buy and sell gold. Fourth, all transactions should take place through banks such as cheque, net banking, and transfers. If someone does not have a bank account and wants to buy gold, that person got the priorities wrong. Needless to say, the authorities should keep an eye on the income of the buyer and buying pattern. 

It is a little different for properties. Investing in properties is a good deal. But in India, rents are not aligned to the market prices of properties. Due to this, the investor is brought to hope for increase in prices to offer reasonable returns. Excessive dependency on prices has made property transactions similar to that of a not-cash-generating asset. The investor will make money only when a greater fool is found. It is pathetic as investors are forced to overpay; blame it on the regulation. As prices seem high enough, buyers consider that using pretax cash is more profitable. It is a vicious cycle: black money channeled to buy property; consideration upon sale received in cash is again used to buy property; and so on.

Bringing tighter regulation is the key to deal with corruption in land and buildings. The single most important thing is to have a mechanism to track every transaction online. Make PAN compulsory for the transaction; I am not sure if it is there in rural areas when small plots of land are bought and sold. Reduce the complexities involved in capital gains tax on property. Bring rentals in line with market prices. For that to happen, value of the transaction should be included for registration purposes. Stamp duty and rentals are then based upon the market value. Again, make transactions through banking channels compulsory; cash cannot be used. Profits made on sale of land and buildings are investment gains; these should be taxed appropriately.

It would be an interesting idea if long term is when property is held for more than 5 years. And how about having a progressive system - short term<= 5 years; 5 to 10 years; 10 to 20 years, and more than 20 years - for capital gains tax?

Demonetization of property and gold, how's that!

ideas to have fun, make money

The Indian stock market ended 2016 at 8185.80, which is just 3% ahead of last year.  

The returns from stock markets are not linear. You cannot expect fixed stream of cash flows from equity; for that you have to go to bonds. Alas, returns from bonds are almost always lower than equities. And in present times, man, it is going to be just equities, if your aim is to make money. 

What amazes me is that people expect stock market returns to be always, always positive. That shows lack of knowledge about what really equities are. 

When you start a business, you are ready to wait for years to make it worthwhile for you. You are aware that some years will be good, and some will be not as good. Yet, you expect the business to be viable in the longer run. When you are a businessman, like many that I know, you are also a highly concentrated investor; that is, most of your wealth is tied to your business. It is because you know that you are making a career out of your business, and want to stay that way for a long, long time. That is great. 

But then, why do you see your stock market investments any differently? When you buy a share in the stock of, say, Nestle, why do you expect it to increase in value every day, week, month, quarter and year? Do you think the value of Nestle as a business should change significantly by the day? Just like your private business, Nestle is also in a business, which is going to be good some years, and not as good in some. This is the crux of investing. The earlier you get it, the wealthier you get in life. 

People who invest in properties do not check price quotes on a daily basis, do they? They are crazy, if they do. There aren't quotes anyway, unless a transaction takes place. Just because there are quotes for your stocks, you are tempted to check. That's crazy too.

The resolution for the coming year is about taming your wild behavior. Stock investing is as much about human emotions as it is about intelligence. If you are not dumb, and are in control of your emotions, you are more likely to be a winner in this game. 

I have four ideas to share which are just enough make someone have fun, and make money at the same time. Don't forget to enjoy life. 

Hate those guys; the crooks

Stop listening to the pundits. Oh yes, stop listening to all those self-proclaimed value investors who write blogs, make up stories, quote Buffett and Munger, and then charge you for their offerings. They quote some philosophers as well just to spice it up. Know that they cannot teach you anything about stock market investing. If they knew, they would have invested for themselves and made money. There would be no need to charge you for their products. I know some of them who also invest in mutual funds; which means they give their money to others to manage. How ironic for someone who claims having knowledge to teach people about equity investing to trust someone else to manage money? It is because they have to pay their bills, they have the need to coin stories to tempt the gullible. Don't get swayed by their morally corrupt thoughts.

Don't care market prices investing

Invest in equities on a periodic basis. The best way is to invest in a broader index in good times and bad. Buying the index each month either in fixed units or fixed currency is good. Here you are not bothered about market prices because the prices average out in your favor in the long run. 

Market prices are the key investing

Then wait for the right opportunity to invest in individual securities. If you think that Nestle is a good business, you analyze the business and come up with a value. You buy the stock only when price is much lower than value. Here you do care about market prices. Your returns are directly proportional to the price that you pay. 

Caution: You cannot play this game if you are not interested in equity analysis or simply have no time. Then you are much better off investing in the index itself. You are guaranteed to earn returns equivalent to the market returns. You would be crazy again if you consider that is not enough. Equities outplay all other investment alternatives if played long enough. 

Control

The promise you have to make is to have a check on yourself, always. Control your emotions: greed, fear and envy. You will not only be having fun in life, but also be wealthier than you ever think you will be.

Speculate in moderation

On a side note, I am also an advocate of speculation. I am aware of the kick it gives; so some more fun is alright. But it should comprise an insignificant portion of your net worth. So if you are so keen, play along. 

8% government bonds

With interest rates falling, and projected to fall in the coming months, for investors in debt instruments, it has become a matter of importance. The 10-year government treasury is now at 6.46%; and 1-year treasury is yielding 6.32%. Bank deposit rates for one year are currently less than 7%. 

When safer debt instruments are below 7%, you tend to check out debt funds, which can probably give returns in the range of 8-9%; not assured though. 

There is one more option for the investors seeking risk-free debt. That is the government's 8% bonds. These were issued in April 2003, and yield a return of a little more than 8%. The catch, however, is the lock-in period of 6 years. 

With the brokerage fee of 1% on purchase, the pre-tax return on cumulative comes to 7.98% and on non-cumulative, 7.94%. At least, these are assured returns. If you estimate that inflation and therefore interest rates are likely to be lower during the period, these are better options compared to bank deposits, especially if you are in the lower tax rate.

For someone, who is in the tax rate of 0%, the returns are not bad to lock-in for 6 years. But then of course, all depends upon the opportunity cost of the investor.