Three things you should know about municipal bond listings

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 2 min read . Updated: 12 Apr 2021, 05:03 AM IST Renu Yadav

The interest rates offered by these bonds currently are on the higher side and above 8%. These are long-term bonds with a tenure of generally 10 years.

The Ghaziabad Municipal Corporation’s green bonds were listed on the BSE Bond platform on Thursday. The municipal corporation has raised ₹150 crore through private placement. The bond is offering an attractive rate of 8.1%. However, it is lower than the 8.5% rate offered by the municipal bonds of Lucknow.

Of late, municipal corporations, including Indore, Ahmedabad and Pune, have been using this route to raise money. Given the fact that they are offering an attractive interest rate of more than 8%, they have got good interest from investors.

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Let’s understand a few aspects of these municipal bonds if you are planning to invest in them.

Return

The interest rates offered by these bonds currently are on the higher side and above 8%. These are long-term bonds with a tenure of generally 10 years. But if you buy them from the secondary market, the current yield is in the range of 7.25% to 8%. Currently, while bank fixed deposits are offering an interest rate of around 6%, an interest rate of 8% is certainly attractive.

Risk

It is always important to take risks in line with the return. These bonds have to be rated. The Ghaziabad Municipal Corporation government bonds are rated AA by India Ratings and AA(CE) by Brickworks. However, as these are issued by municipal corporations, there is no explicit guarantee, but it is implicit in nature. “It has implicit backup from the state government to honour their commitment for both principal and interest," said Vikram Dalal, managing director, Synergee Capital Services Pvt. Ltd.

Also, there is a liquidity risk that investors should keep in mind. “Due to the small size and low trade volumes, it will be difficult for investors to exit the bonds in case they need the money," said Dalal. “It may take 10-15 days for an investor to exit these bonds."

Taxation

The interest earned on these bonds is fully taxable. In case you exit these bonds before maturity on the exchange, the capital gains after one year will be termed as long-term and will be taxed at the rate of 10% without indexation.

Should you invest?

Experts feel that investors can use these bonds to diversify their debt portfolio as they are relatively safe.

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“All being major cities, their financials are robust due to property tax and municipal tax collections," said Dalal.

However, you should invest only if you can hold them till maturity.

“The size of the issue is very small, thus intent should be to remain invested till maturity as liquidity can be an issue," said Dalal.

However, Vishal Dhawan, a certified financial planner and founder of Plan Ahead Wealth Advisors, a Sebi-registered investment advisory firm, said he would prefer state development bonds and invest in them through mutual funds.

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