Several tax-free bonds, issued in 2012-13, are now available at a discount to their issue price of Rs 1,000 in the secondary market. For example, 8.2% NHAI-N2, issued in January 2012 and maturing in January 2022, is now trading at Rs 975. Similarly, 8.26% REC, maturing in 2023, is trading at Rs 980. Bonds typically trade at a discount to their face value when the interest rate moves up. But that is bad news for investors in these bonds.
That is why many of them are wondering whether they should sell these bonds at a loss and subscribe to new tax-free bonds in the market, which offer a higher rate of interest. "It makes sense to hold on to these bonds and not sell at a loss as we expect the interest rate cycle to reverse soon," says Deepak Punjwani, head (debt markets), GEPL Capital.
Most investment experts feel it is a matter of time before interest rates start their downward journey. When that happens, bond prices will recover and will start trading above their face value.
"With the rupee stabilising in the range of 60-62 against the dollar, the immediate priority of the RBI will be to focus on increasing growth and lowering inflation," says Vikram Dalal, managing director, Synergee Capital.
"While rates may rise marginally by 25 basis points in the October policy, this could be the last of the hikes and there will be some indication of cutting rates in the coming months asinflation slows down," says Dalal. He expects the benchmark 10-year government security to trade between 8.25% and 8.35% in the next three months.
The 10-year g-sec is currently trading around 8.50-8.65%. However, this doesn't mean that you should start buying these taxfree bonds from the secondary market. "It doesn't make sense to make fresh purchases of these bonds from the secondary market as yields are lower than the primary market.
If you have additional money to invest in tax-free bonds, use the primary market route," says Deepak Punjwani, head (debt markets), GEPL Capital.
For example, 8.3% NHAI, maturing in 2027, trades at Rs993, giving you a yield of 8.45%. However, there are bond issues from PFC and IILCL in the primary market which offer better yields. PFC offers 8.79% for 15 years, while IIFCL offers 8.63% for the same tenure.
"The quality of issuers in the primary market is the same. Both PFC and IIFCL are backed by the government, carry an 'AAA' rating, which indicates highest safety in terms of timely repayment of interest and principal," says Vikram Dalal.
If you have a longer time-frame in mind, you could even invest for 20 years where rates are marginally higher. PFC offers 8.92% for 20 years, while IIFCL offers 8.75%. "Not only is the interest rate on these bonds high, they also give you an opportunity to earn capital appreciation when rates could fall down," says Vikram Dalal.
For example, if interest rates were to fall by 1% in the next one year, investors could earn as much as 10-12% by way of capital appreciation on a 20-year bond as well as the tax-free coupon rate of 8.92%. This could take your returns to as high as 20-21% per annum
Source - The Economics Times
TEAM RYR&CO.
That is why many of them are wondering whether they should sell these bonds at a loss and subscribe to new tax-free bonds in the market, which offer a higher rate of interest. "It makes sense to hold on to these bonds and not sell at a loss as we expect the interest rate cycle to reverse soon," says Deepak Punjwani, head (debt markets), GEPL Capital.
Most investment experts feel it is a matter of time before interest rates start their downward journey. When that happens, bond prices will recover and will start trading above their face value.
"With the rupee stabilising in the range of 60-62 against the dollar, the immediate priority of the RBI will be to focus on increasing growth and lowering inflation," says Vikram Dalal, managing director, Synergee Capital.
"While rates may rise marginally by 25 basis points in the October policy, this could be the last of the hikes and there will be some indication of cutting rates in the coming months asinflation slows down," says Dalal. He expects the benchmark 10-year government security to trade between 8.25% and 8.35% in the next three months.
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The 10-year g-sec is currently trading around 8.50-8.65%. However, this doesn't mean that you should start buying these taxfree bonds from the secondary market. "It doesn't make sense to make fresh purchases of these bonds from the secondary market as yields are lower than the primary market.
For example, 8.3% NHAI, maturing in 2027, trades at Rs993, giving you a yield of 8.45%. However, there are bond issues from PFC and IILCL in the primary market which offer better yields. PFC offers 8.79% for 15 years, while IIFCL offers 8.63% for the same tenure.
"The quality of issuers in the primary market is the same. Both PFC and IIFCL are backed by the government, carry an 'AAA' rating, which indicates highest safety in terms of timely repayment of interest and principal," says Vikram Dalal.
If you have a longer time-frame in mind, you could even invest for 20 years where rates are marginally higher. PFC offers 8.92% for 20 years, while IIFCL offers 8.75%. "Not only is the interest rate on these bonds high, they also give you an opportunity to earn capital appreciation when rates could fall down," says Vikram Dalal.
For example, if interest rates were to fall by 1% in the next one year, investors could earn as much as 10-12% by way of capital appreciation on a 20-year bond as well as the tax-free coupon rate of 8.92%. This could take your returns to as high as 20-21% per annum
Source - The Economics Times
TEAM RYR&CO.
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