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Tax-free bonds are back in vogue as the benchmark 10-year benchmark bond yield crossed 9% mark recently. This is reflected in the quick response and subscription to AAA-rated tax-free bonds issued by National Thermal Power Corporation, which offered up to 8.91% returns.

Tax-free bonds are back in vogue as the benchmark 10-year benchmark bond yield crossed 9% mark recently. This is reflected in the quick response and subscription to AAA-rated tax-free bonds issued by National Thermal Power Corporation, which offered up to 8.91% returns. It is not just NTPC and HUDCO tax free bonds also received strong response from subscribers. Juxtaposing this reality of increased investments in bonds markets at a time when investors are not too keen to invest in equities, can give us an impression that bond investors are reading something more substantial. But we can be completely wrong. While many would want to ignore them saying that it is the flavor of the season, joining the herd can be un-remunerative as it disturbs the asset allocation of the investors.



Many a time we have seen people talking about losses in investing world and hence people seek to invest in low risk fixed income instruments such as the ongoing tax-free bonds. No doubt it is a good idea to invest in the ongoing long term tax free bond issues such as India Infrastructure Finance Company Ltd (IIFCL), given the lower risk of default and a possibility to earn capital gains over the next couple of years as the interest rates are expected to come down. But that does not mean one should bet his all monies on one such idea. It has been observed that investors redeem money from equities as they obtain the cost of buying shares with rising markets, which they subsequently invest in bonds.

Such a tendency can be counterproductive if it is contradicting the ideal asset allocation of an investor. Consider an example, if an individual aged 30, who plans to retire at the age of 60, is redeeming all his money from equity mutual funds and parking it in tax-free bonds. This is not a wise idea. It is better to stick to asset allocation and keep rebalancing it at regular interval, let's say once in a year.

If you are young, and has some appetite for risk you should ideally have some exposure to equities. It is better to consider investing at least 50% of money in equities with the long-term view. An aggressive individual may have up to 75% of his money in equities, whereas a conservative investor may choose to keep his equity exposure to 10% of total portfolio value. Whatever be the case an allocation to equity is a must along with fixed income exposure.

An important point to note here is to understand that volatility in markets are but violent waves in a sea which rise and go, but eventually subside giving tranquility of mind. So, one should not be much affected by intermittent volatility in the equity markets. One should learn to live with it. Fixed income as an asset class can offer you predictable returns in short to medium term with a little volatility as compared to equity, but in the long term it can generate almost nil returns when adjusted to inflation.

Also fixed income investors should never forget the time-tested wisdom in the financial markets: it is difficult to predict interest rates in the long-term but it is easy to predict long-term expected returns from equities. If you are investing for the long-term, typically more than five years, do not go overboard on fixed income.

Happy Investing!!

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

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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

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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

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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. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

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