Why tax-free bonds could be your best debt bet this year
Mumbai: Rich investors are rushing to buy tax-free bonds in the wake of the rise in yields after the Reserve Bank of India's rate-setting meeting last week. The central bank signalled that there would be fewer interest rate cuts going ahead, causing bond prices to tumble and in turn leading to erosion in values of long-term debt mutual fund schemes.
Bond prices and yields move in opposite direction; when prices rise, yields fall and vice-versa.
“Tax-free bond yields, which stood at 5.9% prior to the monetary policy , rose to 6-6.15%. This is an attractive bet for investors,“ said Vikram Dalal, managing director at Synergee Capital. For example, the NHAI N6, which carries a coupon of 8.75% and matures in Feb 2029, now trades at Rs 1,307, offering a yield of 6.04%. Similarly , IRFC-NE, which carries a coupon of 8.88% and trades at Rs 1,302 maturing in March 2029, now yields 6.15%.
With the RBI changing its chance from accommodative to neutral, indicating that chances of a rate cut are low, bond yields rose by 37 basis points in a span of three days after the monetary policy .
Financial planners point out that tax-free bonds are far attractive when compared to bank fixed deposits. While a fixed deposit from State Bank of India gives you an interest of 6.75% per annum, which translates into a post-tax return of 4.66% for those in the highest tax bracket, tax-free bonds give 6-6.15%. Also, tax-free bonds enjoy easy liquidity as they are listed on the stock exchanges.
Another aspect which works in favour of tax-free bonds is the lim ited supply available in the market. “The Union Budget did not announce any issuance of tax-free bonds in this financial year, which will cap fresh supply in the primary markets. Hence investors have no other option to buy these bonds other than from the secondary market,“ said Anup Bhaiya, managing director, Money Honey Financial Services.
Tax-free bonds were issued in the financial years 2012-13, 2013-14 and 2014-15 with tenures of 10, 15 and 20 years, respectively.
All the companies, which raised these bonds, are well managed PSUs, enjoying 'AAA' ratings. Issuers like NHAI, NHB, NTPC, PFC, IRFC, HUDCO and several others raised money through taxfree bonds. These bonds pay halfyearly interest and do not have any put or call options.
Bond prices and yields move in opposite direction; when prices rise, yields fall and vice-versa.
“Tax-free bond yields, which stood at 5.9% prior to the monetary policy , rose to 6-6.15%. This is an attractive bet for investors,“ said Vikram Dalal, managing director at Synergee Capital. For example, the NHAI N6, which carries a coupon of 8.75% and matures in Feb 2029, now trades at Rs 1,307, offering a yield of 6.04%. Similarly , IRFC-NE, which carries a coupon of 8.88% and trades at Rs 1,302 maturing in March 2029, now yields 6.15%.
With the RBI changing its chance from accommodative to neutral, indicating that chances of a rate cut are low, bond yields rose by 37 basis points in a span of three days after the monetary policy .
Financial planners point out that tax-free bonds are far attractive when compared to bank fixed deposits. While a fixed deposit from State Bank of India gives you an interest of 6.75% per annum, which translates into a post-tax return of 4.66% for those in the highest tax bracket, tax-free bonds give 6-6.15%. Also, tax-free bonds enjoy easy liquidity as they are listed on the stock exchanges.
Another aspect which works in favour of tax-free bonds is the lim ited supply available in the market. “The Union Budget did not announce any issuance of tax-free bonds in this financial year, which will cap fresh supply in the primary markets. Hence investors have no other option to buy these bonds other than from the secondary market,“ said Anup Bhaiya, managing director, Money Honey Financial Services.
Tax-free bonds were issued in the financial years 2012-13, 2013-14 and 2014-15 with tenures of 10, 15 and 20 years, respectively.
All the companies, which raised these bonds, are well managed PSUs, enjoying 'AAA' ratings. Issuers like NHAI, NHB, NTPC, PFC, IRFC, HUDCO and several others raised money through taxfree bonds. These bonds pay halfyearly interest and do not have any put or call options.
