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Want tax benefits on your investment returns? Pick Tax-Free Bonds

Wednesday, November 13, 2013 | Category : Fixed Income | 2 Comments
Investors seeking fixed-income instruments can try tax-free bonds. These bonds have caught immense attention in the recent years. Unlike fixed deposits, National Savings Certificates (NSCs) and other bonds, the interest earned from these bonds are tax free. Apart from offering tax benefit, these bonds offer safer heaven to your money and help them grow. 

These bonds are good particularly for investors in the higher tax bracket of 30% and 20% as they provide fairly good investment opportunities to such investors. Tax-free bonds also offer considerable scope of capital appreciation and can be easily traded over the exchange.

Recently, many government owned companies have come out with tax-free bonds, out of which few institutions have done extremely well. Power Finance Corporation (PFC) and National Hydroelectric Power Corporation (NHPC) are among the ones that attracted investors’ eyeballs.  

The tax-free bonds issued by both the companies are issues with 20 year tenure and will offer 8.92% coupon rate each year to investors. For people under higher tax bracket, this is a tempting opportunity.      

Things you need to remember before investing in Tax-Free Bonds:

Having said that tax-free bonds can be one of the best investment options owing to the taxation benefit they offer, there are few areas which should be examined thoroughly before considering this particular option.  
  
1. Rating: There are many investors who go in with the institutes which are assigned a AAA rating by agencies. However, experts are of the opinion that there needn’t be any strict rule. Even AA+ companies can also be a fruitful investment. It has been observed that companies which have lower rating offer a higher coupon rate compared to AAA companies. 

2. Liquidity: Not just for investors who go about putting in their money with the intention of booking profits once the yields fall, liquidity is an important factor for long term investors as well. The investment made should aid at unforeseen circumstances and the investors should easily can liquidate these instruments. So, preference should be given to companies that are planning to list on both the BSE and the NSE.   

3. Size of the issue: Another important area that needs your attention is the size of an issue. The larger the amount, the higher the probability of good volume after listing. You can also get an idea about the possible volume by looking at the existing volumes of previous issues of the company.      

4. The Right tenure: Yet another important area to be looked upon is the right tenure of the issue. There are bonds which have 10-15 year term. However, experts suggest that investors should ideally go for long duration bonds, say 20 year term. Since there are no put or call options for these bonds, you must decide the time periods for which you want to remain invested. 

In the end, let us tell you who amongst you should invest in tax-free bonds. Individual investors, Hindu Undivided Families (HUFs), high net worth individuals and corporates can invest in these bonds. As per different sources, there will be a wave of tax-free bonds in the coming months. So try to explore this investment option and enjoy its benefits. 

Disclaimer: 

1. Views as are mentioned in the article are personal views of Author and nothing to link with Co., its Director and Employees.
2. All investments are subject to market risk and you need to consult your financial advisor/consultant before investment.





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