Skip to main content

Why are Tax free bonds 2012 - 2013 are flopping?

Every time Finance Minister P Chidambaram finds himself cursing the Reserve Bank of India (RBI) Governor for not cutting interest rates, he should ask himself whether the latter is more sinned against than sinning.

Despite some signs of an easing in inflation rates in November, the market for money is actually sending this message: that rates cannot, or should not, fall too soon.

Short-term liquidity is very tight. Thanks to advance tax payments, the RBI is lending overnight funds to banks. Reuters

Consider three recent signals.

#1: On the assumption that we are now clearly into a declining rate scenario, many government-owned companies lowered the coupon rates offered on tax-free bonds. But these bonds are not exactly flying off the shelves. This means investors want higher rates.

#2: Even though the big banks are holding deposit rates, smaller banks are feeling the strain. Today's newspapers tell us that both Dena Bank and Federal Bank have raised deposit rates, since money is tight. While Dena has raised rates for deposits between one and two years from 8.75 percent to 9.1 percent from 22 December, Federal has raised it to 9 percent for tenures of one to three years.

#3: Short-term liquidity is very tight. Thanks to advance tax payments, the RBI is lending overnight funds to banks to the tune of Rs 1,63,000-and-odd crore daily. Even though this tightness may be temporary, the figure is still huge given that there is a Rs 1,00,000 crore gap between what the RBI considers a healthy liquidity gap and what it is now. Also, the advance taxes sucked out just Rs 78,000 crore from the system – which means liquidity is tightening for other reasons, too.

Of the three signals, the inability of issuers of tax-free bonds to mop up resources is telling. At coupon rates of 7.69 percent for 10-year bonds and 7.86 percent for 15 years, the pre-tax yields for people in the top brackets are as high as 11.13 percent and 11.37 percent—well above even consumer price inflation.

But, as Business Standard reports, investors, even high-net-worth investors, are not taking the bait of higher pre-tax yields.

The report says that Power Finance Corporation's Rs 5,600-crore bond issue (including the green-shoe option) has been extended by nearly a week to close on 27 December since it had obtained only 60 percent bids. Rural Electrification Corporation raised only Rs 3,000 crore against a target of Rs 5,500 crore, and bankers are keeping their fingers crossed on the India Infrastructure Finance Company's bumper offer of close to Rs 10,000 crore which opens on 26 December offering similar interest rates.

The newspaper quotes wealth manager Raghvendra Nath of Ladderup Wealth Management as saying: "A yield of 7.2 percent is not exciting for HNIs (high net worth investors) or companies, despite being tax-free, because the returns are much lower than the 8.1-8.3 per cent they received last year."

*There is only one reason why this must be so. Inflationary expectations are still high, both among consumers and investors.

Moreover, with the stock market showing signs of a revival, HNIs, who get about 0.5 percent less than retail investors in tax-free bonds, have other options.

Clearly, the finance ministry's efforts to talk up the markets while trying to push interest rates down is sending contradictory messages in a business scenario where demand for funds is rising, inflation expectations are still high, and foreign flows (being encouraged to keep the rupee down), are raising stock prices.

Investors and savers are telling us that interest rates need to remain high for a while longer.

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

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

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

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  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

 

Popular posts from this blog

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...

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...

Right Size your SIPs in terms of tenure and amount

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India)    Systematic investment plans ( SIPs ) are here to stay. Going by the growing number of SIPs, it does look like investors have taken to them in a big way. Today as much as . 1,000 crore flow into SIPs every month. A SIP, as the name denotes, is a method to invest a fixed amount in a mutual fund at regular intervals --generally monthly or quarterly. It is easy to do and the minimum amount with most mutual funds is a mere . 1,000 per month. You can write post-dated cheques for your investment, or give an auto-debit facility from your bank account. In fact, most investors today prefer setting up an auto debit for their SIPs, since writing cheques is cumbersome. Also, you can choose any tenure that you want for your SIP — six months, one year, five years, 10 years or even opt for a perpetual SIP which will continue forever till you stop it....

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...

Compared to Bank FDs, Debt Mutual Funds are more Tax-Efficient

It is a security vis-a-vis returns battle between bank fixed deposits and debt funds In the past few months, banks have been consistently increasing their rates of interest on different fixed deposits. And after the Reserve Bank of India's Annual Monetary Policy, even the saving deposit rates are up at 4 per cent. For a six-month fixed deposit, you can easily get a rate of anywhere between 6 and 7 per cent annually. However, experts feel if one is looking to invest for less than a year, debt funds could make a better choice. The reason: Liquid funds and ultra short-term funds are giving annualised returns of 8 per cent. Financial advisors suggest retail investors opt for mutual fund schemes as they are more flexible and give higher post-tax returns. Opt for fixed deposits only if you are comfortable being locked-in for the tenure as a premature exit can attract a penalty. If your main aim is to ensure liquidity, debt funds are preferable. Though a fixed deposit gives you a...
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