What a difference a span of five months makes! Tax-free bonds seem to have got their groove back. The market is bracing for a host of such instruments, with the one from Rural Electrification Corporation (REC) slated to open for subscription starting Friday.
Earlier this year in February-March, the tax-free bonds issued remained a non-starter, with investors giving it a clear thumbs-down. But things have changed ever since. This time of the year, it makes more sense for long-time investors to lock in their money in current issues, agree financial experts.
The logic is simple. This is because earlier this year, the 10-year benchmark yield was hovering in 7.8-7.9% and therefore, the coupon rates were not too attractive. But now, the yields have risen sharply, even crossing the 9% mark earlier this month on account of a precipitous rupee fall.
The coupon rates in February-March stood between 7.3-7.5% for retail investors. Check out REC, which is offering a coupon rate of 8.26%, 8.71% and 8.62% for a timeframe of 10, 15 and 20 years, respectively.
Kartik Jhaveri, CEO, Transcend Consulting, says that at this rate the offer makes lot of sense, especially for investors in the higher tax bracket.
“Pre-tax yields for someone in the 30% tax bracket will work out to be around 12.4% and if you compare that with other fixed income instruments such as fixed deposits, then definitely a tax-free bond scores better.”
Shiv Kukreja, a Delhi-based financial planner who runs Ojas Capital, backs it to the hilt. “One thing which is very important to notice here is the difference between the rates offered to retail individual investors and the other categories of investors has been cut down to 25 basis points (or 0.25%), as compared to last year’s 50 basis points (or 0.50%).
This factor also would attract higher participation from the other categories of investors and thus increase liquidity in secondary markets.”
That’s not all. To make tax-free bonds more alluring, there have been more changes introduced that will ensure higher yield.
“The cap on the ceiling coupon rate will get higher as the deductions from the reference rates (government security) have been lowered to 55-80 basis points as compared to 65-115 basis points of last year and this will result in higher coupon rates,” explains Kukreja.
For instance, if the average yield on government bond rates is 9% then till the last issue, the maximum coupon rate offered could be 7.85% (9-115bps) for retail investors. But this time round, it can be 8.20% (9-80 bps).
This year, 13 PSUs are set to raise `48,000 crore from these bond options and therefore, you can choose on the basis of the paper and the coupon rate available.
Kalpesh Ashar, who runs Full Circle Financial Planners and Advisors, calls for a bit of restraint. He says that despite the fact that it is a decent investment opportunity, one should not invest in it without evaluating one’s financial needs.
“It makes sense for long-term investors who don’t have much exposure to debt. But investors who have liquidity concerns can skip this investment option,” he adds.