Tax-Free Bonds Shine in Sec­ondary Mar­kets, Too

The Economic Times - - Companies: Pursuit Of Profit -

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.

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