Tax free bonds….
India Infrastructure Finance Co. Ltd (IIFCL) is a government-owned company and loans it undertakes are guaranteed by the government.
The company is authorized to raise up to Rs.10,000 crore through such bonds in this fiscal and has already raised around Rs.2,963 crore through private placements.
This issue aims to raise Rs.500 crore with an option to retain oversubscription up to Rs.2,000 crore.
These secured bonds come in 3 series of different maturities—10, 15 and 20 years.
The coupon rate is 8.26% for the 10-year bond, 8.39% for the 15-year bond and 8.75% for the 20-year bond.
For retail investors, this is 0.25% more than investors in other categories.
For people in any age group…just opt for the 20 year bond – not sure if there is a cumulative option. If there is a cum option put a small amount of money – say Rs. 100,000 in the cum option. In the regular option you should put say 20% of your debt portfolio.
Tax free 8.75% is far, far superior to all the annuities in the market. The last time I checked out the annuity pricing it was at about 7% by LIC – the others were WORSE. – and that too taxable.
Assuming you are say 63 years of age – this 20 year bond will see you through the major part of your life – and it is free of default risk. I may still worry a little bit about delay risk, but not too much.
Is there still a risk? yes…the risk of ‘Call’ – if the interest rates drop to say 5% (remember 2006?) the company may just cancel the debentures – AND REFUND THE MONEY to you – but if I would live with that.
When I say a product is good, I have no clue whether it suits YOU or not. That is for you or your financial planner to decide.
Like if somebody tells me ‘Kentucky Fried Chicken’ has introduced a new mouth watering chicken dish, I can at best smile – it is not for me!
Remember you owe me a fee…..
Abhishek
Sir,
PFC is offering 8.92% for 20 years.. Thats very attractive for an annuity.
Abhishek
Karthikraja
Hello Subra,
If i have surplus after PPF, Do i go for Tax free bond. I am just 32.
I have comfortable exposure to Equity via MF and Shares.
Ashok
Subra Sir, Do you think these tax free Bonds make sense even for someone in their early thirties?
subra
makes sense for anybody who wants to construct a debt portfolio…
Abhishek PFC is also good…in a portfolio better to have 2-3 of these sarkari paper…assuming same risk level…just worried about the delay risk…
Sanjay Singhaniya
What do you think about salaried people in the age group of 30 to 40. Should do they invest in these tax free bonds or should invest in debt mutual funds?
Aditya Pandey
Hi Subra sir
How do we know that this bond is backed by sovereign guarantee of Union government. I mean MTNL, BSNL, Shipping corporate are also government companies yet I would not come any where near them as they are loss making concerns. Their employees are not sure of pensions. How can I be sure that this ‘corporation’ also does not turn out like that?
C.J.GOPINATH
The offer document does not mention about call or put option.
us121
PFC seems to be a better choice presently with 8.92% Annual return for 20 yrs option.
Also it is rated AAA v/s IIFCL rating of AA+, though a very minor thing to consider.
Just to clarify a point raised by Subba, All These Tax Free bonds do not have any option of Cumulative payment of interest, they are paid on Annual basis.
DJ Waghmare
Very badly written blog. Please hire a professional editor. Please understand difference between debenture and tax free bond. Please also read offer document before writing about call option. What is your background? Why are you comparing LIC policy to a tax free bond? Please explain. Thanks. Waghmare.
subra
Surely I should not compare LIC to a bond. A bond matures. I do not understand the diff between a debenture and a bond, so excuse me. Of course i cannot compare a LiC policy to a tax free bond, how stupid of me. Mr DJ Waghmare will you explain what you mean? Me, no understand please.
Ravi
Hi Subra,
Please validate the following idea.
I am 36 years old without exposure to PPF.
My idea is to invest in the tax free bonds for the 15 years time period, (say 10 lacs), invest the interest a PPF for the next 15 years. At the end of the 15 years, i would have a sum which is totally non taxable.
Thanks
Ravi
Ramesh
@ C J Gopinath
The name of the instrument is
Tax-free (interest is tax-free),
Redeemable (this is the option which is also called as ‘Callable’, and it means that if the company feels that it can get money at lower interest rates or otherwise, it can handout your principal back and close the debenture), and
Non-convertible (cannot be converted into Equity) Bonds.