Skip to main content

Tax free bonds are good for risk averse investors

Buy Gold Mutual Funds

Invest Mutual Funds Online

Download Mutual Fund Application Forms

Consider returns, liquidity and safety before investing

TAX free bonds issued by government-promoted infrastructure development companies, will hit the markets again this year to raise Rs 60,000 crore, as announced in the Union budget. Last financial year, the National Highway Authority of India (NHAI), Power Finance Corporation (PFC), Rural Electrification Corporation (REC), Housing and Urban Development Corporation (Hudco) and Indian Railway Finance Corporation (IRFC), raised Rs 30,000 crore through this route.


Consider risk appetite: Risk-averse investors can consider tax-free bonds as a viable option to park their money. Going by the 10year benchmark yield at 8.16 per cent now, these bonds are likely to have 8 per cent to 8.50 per cent interest rate this year. Investors should consider all aspects, such as returns, liquidity and safety before investing in such new instruments.

In a tax-free bond, the tax advantage is not on the principal investment amount that in some instruments, such as public provident fund, can be deducted from the total income. The tax advantage in a tax-free bond is on the interest. The interest earned on the tax-free bonds is not added while calculating personal income tax. The interest is paid annually on a fixed date every year.


Matter of interest: A taxfree interest of 8 per cent and above is higher than bank fixed deposits (FDs), where 10-year rates of 9.75 per cent may fetch higher gross returns, but, post-tax returns for investors in the 30 per cent tax bracket will be lower because they will have to pay 30 per cent tax on the bank interest income. If an investor, in the 30 per cent tax bracket, invests, say, Rs 50,000 in a 8 per cent tax-free bond, he gets Rs 4,000 tax-free interest every year, but, the interest earned on reinvesting it will be taxable at 30 per cent. These reinvestments, whether in a bank FD or in other fixed income instruments, will be at in terest rates prevailing in the future, which may be higher or lower than the present rates.

In a 10-year bank FD paying 9.75 per cent, the reinvestments of interest will take place at 9.75 per cent, though the interest earned on them will continue to be taxable at 30 per cent for the same investor.


Thus, if interest rates prevailing in the future are far lower than the present rates, then, the bond investor's returns at the end of 10 years, after reinvesting the tax-free interest at those low rates, may not surpass bank FD returns.


Key differentiators with FDs: Unlike in bank FDs, liquidity could be a problem in tax-free bonds, even though they are listed on stock exchanges. The traded bonds may not see enough buyers and sellers, and even otherwise, they may fetch you a market rate lower than the intrinsic value of your bond since interest rates may have fallen by then.

In terms of safety, these bonds may have an AAA rating now, but, there is no guarantee that it won't be downgraded later and pose a risk to your principal amount. 

 

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds        Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds     Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds    Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds             Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds              Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Gold Mutual Funds             Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

 

Popular posts from this blog

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...
Read more

How much to invest in gold ?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) Let your motivation dictate the share of the yellow metal in your portfolio Enough has been said and written about gold as an investment option. The latest argument is that the craze for gold among Indian households is endangering our country's balance of payments. The policymakers are busy trying to find ways of discouraging investment in gold, but if households keep the common good in mind, they would be paying the market price for gas cylinders as they do for, say, their mobile phone bills. After all, private decisions are driven by private motives. So, how should a household look at gold from its own perspective? Gold is primarily acquired for its merit as a store of value. Even if the worst crisis hits a family, the gold that it holds could be put to use anywhere in th...
Read more

Save Tax With Mutual Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300       Mutual funds are ideal as long term investment avenues for retail investors. To encourage investments in this avenue, the Government of India offers investors a spate of tax benefits thus ensuring maximum benefit from mutual funds held beyond a year. Sample some of the key benefits and refer to the table for a detailed list of tax rates for different types of schemes ·        Avail deductions under Sec 80C of the Income Tax Act by investing up to a maximum of Rs. 1 lakh in designated Equity Linked Savings Schemes (ELSS). Such investments have a compulsory lock in period of 3 years. ·        First time retail investors in equity with a gross total income of up to Rs. 12 lakh can invest up to Rs. 50,000 in specific MF schemes un...
Read more

What are the factors affect the changes in Interest Rate of Fixed Deposits?

  What are the factors affect the changes in rate of Fixed Deposits? Fixed Deposits are now considered to be a very old fashioned method of saving, but still attract many investors since they have guaranteed returns at the end of the tenure of the investment at a decent interest rate. There are various factors that affect the rates of interest for a Fixed Deposit. Policies of the Reserve Bank of India   - The several norms and restrictions posed by the Reserve Bank of India , in order to gain optimum control over credit and inflow and outflow of fund throughout the country. The repo rate changes, cash reserve ration tends to change and these changes affect the banking products like Fixed Deposits, loans etc. Recession   - When unemployment in a country crosses the benchmark set Recession hits, and slowly the country faces an economic slow movement, affecting the purchasing power of the people in the country, forcing the Reserve Bank of India to release more funds in the financial marke...
Read more

Reliance Health Total

  Reliance Life Insurance has launched Reliance Health Total, a non-linked, non-participating and non-variable health insurance plan . It provides a fixed benefit cover for hospitalisation, critical illnesses and surgeries. The customer can also make a claim for over-the-counter health-related expenses. This is a regular-pay, five-year plan that can be renewed till the age of 99. The plan comes with two options: customers can choose a higher medical reimbursement benefit or a higher sum insured. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - I...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now