Skip to main content

Tax Free Bonds on Stock Exchanges are Attractive for Investors

Buy Gold Mutual Funds

Invest Mutual Funds Online

Download Mutual Fund Application Forms

Call 0 94 8300 8300 (India)

Most investors route their fixed income investments through mutual funds. However, they can also directly invest in bonds/debentures in the primary or secondary markets. One of the issues in direct exposure through bonds/debentures is credit quality: better rated papers would have a relatively low yield; and for a better yield, credit rating would be relatively low. Now there is an opportunity available for taking exposure directly in bonds: the tax-free bonds issued by five PSUs — NHAI, IRFC, HUDCO, REC and PFC. These PSUs are all rated 'AAA' except HUDCO, which is rated one notch lower at AA+'.
The returns available on these good credit quality bonds are attractive, and there is liquidity in the secondary market in lot sizes affordable to regular investors.


To understand the return from these bonds (the reason it is being called an attractive investment opportunity), let us say the investor is in the highest tax bracket of 30%. Let us assume, for simplicity, the purchase price of the bond in the secondary market is same as the face value of . 1,000 per bond. The coupon (interest) rate is say 8%. The equivalent rate for a taxable coupon (which would be the other comparable option for the investor) is 8% / (1-30.9%) = 8%/0.691 = 11.58%. It is lucrative to get a rate of return of 11.58% (pre-tax equivalent) for a credit quality that is as safe as 'AAA' rated PSU. As of now, the range of yields available in the secondary market is in a range of 20 to 30 basis points around 8% (post tax).


Operationally, the way the investors can transact in these bonds is that these are listed on the stock exchanges (NSE and/or BSE) in the equity segment. Please do not get confused with the listing in the equity segment; these are bonds, not equities, the listing in the equity segment is to offer the operational flexibility of the equity segment.
The process for transaction is the same as that of dealing in an equity stock: you have to place an order with your stock broker and you have to have a demat account.


The other segment of the exchanges is the WDM segment that is essentially wholesale in nature where deals are negotiated in lot sizes of . 5 crore. Trades take place in lot sizes of less that . 5 crore as well in the WDM segment, but a size of say . 2 crore would be out of reach for the regular investor — a fact that underscores the relevance of listing of these bonds in the equity segment.


A concept that investors should be aware of in this context is "clean price" and "dirty price". A price that includes the accrued or accumulated interest from the last interest payment date to the date of the transaction is called "dirty price" (which may also be called cum-interest) and a price that does not include the accumulated interest is called "clean price".


In the equity segment, the price quoted for these bonds is dirty price or cum interest i.e. the buyer need not pay anything over and above the quoted price. In the WDM segment, the price may be clean i.e. an investor has to pay the accrued interest separately over the quoted price.


However, remember that while the coupon (interest) on these bonds is tax free, the gains on selling the bonds in the secondary market is taxable as capital gains – short-term for a holding period of less than one year and long-term for a holding period of more than one year.


While there is no debate on the attractiveness of investment in these tax-free bonds mentioned above, one small counter-argument could be that there would be further issuances of similar tax-free bonds in this financial year.


The amount sanctioned through the Union Budget is . 60,000 crore for this financial year (2012-13), against . 30,000 crore in 2011-12. In case the coupon rates on the issuances that would come this year are marginally higher than last year, the price of the ones that are currently available in the secondary market may drop marginally.


Since we are not sure of the coupon rates that are about to come, it is better to stagger the purchases over a period of time; in case the coupons of the forthcoming issues are lower, the current ones would be better.

 

Happy Investing!!

 

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

 

Leave your comment with mail ID and we will answer them

                        OR

You can write back to us at prajnacapital [at] gmail [dot] com

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

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

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

ICICI Prudential Value Fund Series I

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   Performance of the scheme will be benchmarked to the S&P BSE 500 index ICICI Prudential Value Fund is a closeended equity scheme. The scheme will have tenure of three years (1095 days) from the date of allotment of units. Units of the scheme will be fully redeemed at the end of the maturity period, unless rolled over. NFO PERIOD:   The NFO is open from October 18 to 28. The minimum subscription during the NFO period is Rs 5,000. SCHEME OBJECTIVE:   The scheme aims to provide long-term capital growth by investing in a well-diversified portfolio of equity and equity-related securities. INVESTMENT STRATEGY:     The fund proposes to invest in stocks that are trading at a huge discount in the BSE 500 index and plans to book profit and distribute dividen...
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