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

What is Electronic Clearing Service (ECS)?

  As the name suggests, it's an electronic process through which money can be transferred from one bank account to another. According to RBI, this mode is usually used for regular payments and receipts, like distribution of dividend, interest, salary, pension etc. This mode is also used for collection of bills for telephone, electricity, water, various types of taxes, payment of EMIs , investments in mutual funds , payment of insurance premium etc. There are two types of ECS , like most other banking transactions, ECS credit and ECS debit. An ECS credit is used by a bank account holder , usually a large company or an institution for services like payment of dividend, in terest, salary, pension etc. If your mutual fund pays you dividend to your bank account, of all probability it is being paid through ECS credit.ECS debit, on the other hand, is used when a company or an institution is getting money from a large number of people. For example if you are investing in a mutual fund sc...

WEALTH TAX

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 WEALTH TAX   WHAT CONSTITUTES WEALTH? For wealth tax purposes, "wealth" means property , urban land, car, jewellery , yacht, boat, aircraft and cash in hand in excess of Rs 50,000. CAUTION POINT | Do not think you will have an easy escape from wealth tax by transferring your `wealth' without consideration to your spouse or minor child. Such assets will also be considered as your wealth. HOW TO DETERMINE YOUR TAXABLE WEALTH Add the taxable value of the above assets (computed as per the detailed rules for valuation) owned by you as on March 31 (for FY 2014-15, it will be March 31, 2015). In case you sold your car during the year, it will not be taxable wealth. Deduct loans if any obtained by you to acquire any of the taxable assets from the value of gross tax out for at least 300 days in a...

Equity Savings Fund

Invest Equity Savings Fund Online   The best part about these funds is that they are subject to equity fund taxation and at the same time are structured like MIP like funds . This new category, equity savings funds , offer a little of everything. They allocate money to equities & equity related instruments, and fixed income. They aim to generate returns by diversification. Such funds invest in fixed income and arbitrage to protect the investors from short term volatility and equity for capital gains. The best part of these funds is that they are subject to equity fund taxation and at the same time are structured like MIP funds.   MIP funds however are subject to debt fund taxation. Investors Equity savings funds are suitable for the following: First time investors who seek partial exposure to equity with less volatility and greater stability Investors seeking moderate capital appreciation with relatively lower risk Those wh...

How to Pick Top Performing Mutual Fund Schemes

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   How to Pick Performing Schemes  Funds that continue to stay in the top grade of performance over longer periods are the ones to bet on, advise investment experts   The mutual fund performance charts of the past few months make for an impressive reading. Funds across all categories boast of stellar returns. Sample this: The mid and small cap category has averaged 77 percent return over the past 12 months, with the best fund delivering a staggering 120 percent. The tax-saving funds also average an impressive 51 percent, including a fund which has soared 92 percent. Many of the table-toppers are funds of proven quality and track record. However, there are also schemes that are not that well-known. Some of these have rarely made it to the performance charts in the past, yet, of late, they bo...

8% Government of India Bonds quick guide

For those seeking comfort in safety of returns, the Government of India issued 8% savings bond once again comes to the fore. First launched in 2003, these bonds are issued by the government with a maturity of 6 years. The bonds are available at all times with specified distributors through whom you can apply to invest in them. Here is a quick guide to what the bond offers and its features to ascertain to check for suitability. What are Government of India bonds Government of India bonds are like any other government bonds with specified rate of interest. The rate is fixed at 8% per annum paid half yearly, or you can opt for cumulative payment of interest at the end of the tenure. You can buy these bonds from State Bank of India and its associates, other nationalized banks and some private sector banks such as HDFC Bank Ltd and ICICI Bank Ltd, among others. The bonds can be bought from the offices of Stock Holding Corporation of India as well. They are available in physical form onl...
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