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Friday, December 27, 2013

Stay Invested in Tax Free Bonds

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SEVERAL tax-free bonds, issued in 2012-13, are now available at a discount to their issue price of 1,000 in the secondary market. For example, 8.2 percent NHAIN2, issued in January 2012 and maturing in January 2022, is now trading at 975. Similarly, 8.26 percent REC, maturing in 2023, is trading at 980.


Bonds typically trade at a discount to their face value when the interest rate moves up. But that is bad news for investors in these bonds. That is why many of them are wondering whether they should sell these bonds at a loss and subscribe to new tax-free bonds in the market, which offer a higher rate of interest. It makes sense to hold on to these bonds and not sell at a loss as we expect the interest rate cycle to reverse soon. Most investment experts feel it is a matter of time before interest rates start their downward journey. When that happens, bond prices will recover and will start trading above their face value.


With the rupee stabilising in the range of 60-62 against the dollar, the immediate priority of the RBI will be to focus on increasing growth and lowering inflation.


While rates may rise marginally by 25 basis points in the October policy, this could be the last of the hikes and there will be some indication of cutting rates in the coming months as inflation slows down.


The benchmark 10-year government security to trade between 8.25 percent and 8.35 percent in the next three months. The 10-year g-sec is currently trading around 8.50-8.65 percent. However, this doesn't mean that you should start buying these taxfree bonds from the secondary market.


It doesn't make sense to make fresh purchases of these bonds from the secondary market as yields are lower than the primary market. If you have additional money to invest in tax-free bonds, use the primary market route. For example, 8.3 percent NHAI, maturing in 2027, trades at . 993, giving you a yield of 8.45 percent. But, there are bond issues from PFC and IILCL in the primary market which offer better yields. PFC offers 8.79 percent for 15 years, while IIFCL offers 8.63 percent for the same tenure.


The quality of issuers in the primary market is the same. Both PFC and IIFCL are backed by the government, carry an 'AAA' rating, which indicates highest safety in terms of timely repayment of interest and principal. If you have a longer time-frame in mind, you could even invest for 20 years where rates are marginally higher. PFC offers 8.92 percent for 20 years, while IIFCL offers 8.75 percent. Not only is the interest rate on these bonds high, they also give you an opportunity to earn capital appreciation when rates could fall down.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

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You can write back to us at PrajnaCapital [at] Gmail [dot] Com

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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

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These Application Forms can be used for buying regular mutual funds also

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  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

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