Tax-Free Bonds Shine in Secondary Markets, Too
Bonds floated by govt entities can fetch as much as 2-5% more than bank fixed deposits in a softening interest rate regime
Mumbai: S av v y i nve s t o r s seeking higher-than-average returns from fixed income instruments are buying tax-free bonds from the secondary markets. These risk-free bonds, floated by various government entities in the last four years, could fetch as much a s 2 - 5 % more than bank fixed-deposits in a falling interest rate scenario.
Tax-free bonds are traded on the stock exchanges just like shares. Wealth managers say the appetite is strong for most taxfree bonds but higher for the ones issued earlier this year because of higher yields.
“Certain series of tax-free bonds issued in March such as Hudco, NHAI, Nabard are available in the secondary markets and offer yield of 7-7.05%. This translates into a pre-tax yield of 10.5%,” said Vikram Dalal, managing director, Syngergee Capital. For instance, the 7.69% NHAI – NE, trading at ₹ 1,057, will pay an annual interest of 7.69% in October every year. It has a tenure of 15 years.
Compared to this, a fixed-deposit from State Bank of India which pays a maximum of 7.5% interest per annum would bring a post-tax yield of 5.18% for an investor in the highest tax bracket. Tax-free bonds score over fixed deposits from banks, espe- cially for those investors in the high tax brackets.
Some investors are in it to bet on the falling interest rates.
“In a scenario where interest rates are headed down, you stand a chance to make capital gains as well,” said Dalal.
Longer the tenure of the bond, higher could be the capital appreciation. If interest rates were to fall by 50 basis points, investors can hope for a capital appreciation of 2.4-3% on a 10-year bond, while they can pocket a gain of 4-5% for a 20-year bond.
Tax-free bonds are also witnessing higher trades as no fresh supply is expected this year. “No taxfree bonds have been announced by the government in the Budget for this financial year,” says Ajay Manglunia, head (fixed income), Edelweiss Capital. So, if investors want to invest in these bonds, the only way they can get these bonds now is to buy them from the existing investors. Wealth managers say there is good liquidity in those issues where the size was more than ₹ 1,000 crore. Issues of the likes of NHAI, Hudco, Nabard and IRFC are attracting good liquidity compared to smaller issuances like NTPC, PFC and REC.
Wealth managers, however, add investors need to be careful while buying these bonds as the government has changed tax rules abruptly in the last four years.