The Economic Times - - Companies: Pursuit Of Profit -

Mumbai: Rich in­vestors are rush­ing to buy tax-free bonds in the wake of the rise in yields af­ter the Re­serve Bank of In­dia’s rate-set­ting meet­ing last week. The cen­tral bank sig­nalled that there would be fewer in­ter­est rate cuts go­ing ahead, caus­ing bond prices to tum­ble and in turn lead­ing to ero­sion in val­ues of long-term debt mu­tual fund schemes. Bond prices and yields move in op­po­site di­rec­tion; when prices rise, yields fall and vice-versa. “Tax-free bond yields, which stood at 5.9% prior to the mon­e­tary pol­icy, rose to 6-6.15%. This is an at­trac­tive bet for in­vestors,” said Vikram Dalal, man­ag­ing di­rec­tor at Syn­ergee Cap­i­tal. For ex­am­ple, the NHAI – N6, which car­ries a coupon of 8.75% and ma­tures in Feb 2029, now trades at ₹ 1,307, of­fer­ing a yield of 6.04%.


Sim­i­larly, IRFC-NE, which car­ries a coupon of 8.88% and trades at ₹ 1,302 ma­tur­ing in March 2029, now yields 6.15%.

With the RBI chang­ing its chance from ac­com­moda­tive to neu­tral, in­di­cat­ing that chances of a rate cut are low, bond yields rose by 37 ba­sis points in a span of three days af­ter the mon­e­tary pol­icy.

Fi­nan­cial plan­ners point out that tax-free bonds are far at­trac­tive when com­pared to bank fixed de­posits. While a fixed de­posit from State Bank of In­dia gives you an in­ter­est of 6.75% per an­num, which trans­lates into a post-tax re­turn of 4.66% for those in the high­est tax bracket, tax-free bonds give 6-6.15%. Also, tax-free bonds en­joy easy liq­uid­ity as they are listed on the stock ex­changes. An­other as­pect which works in favour of tax-free bonds is the lim- ited sup­ply avail­able in the mar­ket. “The Union Bud­get did not an­nounce any is­suance of tax-free bonds in this fi­nan­cial year, which will cap fresh sup­ply in the pri­mary mar­kets. Hence in­vestors have no other op­tion to buy these bonds other than from the se­condary mar­ket,” said Anup Bhaiya, man­ag­ing di­rec­tor, Money Honey Fi­nan­cial Ser­vices.

Tax-free bonds were is­sued in the fi­nan­cial years 2012-13, 2013-14 and 2014-15 with tenures of 10, 15 and 20 years, re­spec­tively.

All the com­pa­nies, which raised these bonds, are well man­aged PSUs, en­joy­ing ‘AAA’ rat­ings. Is­suers like NHAI, NHB, NTPC, PFC, IRFC, HUDCO and sev­eral oth­ers raised money through taxfree bonds. These bonds pay hal­fyearly in­ter­est and do not have any put or call op­tions.

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