The bonds offer attractive rates, have high credit ratings

There’s a deluge of tax-free bonds on offer as the fiscal draws to a close. Three tax-free bond offers — from HUDCO, Rural Electrification Corp (REC), and Indian Railway Finance Corp (IRFC) — opened last Friday.

IRFC, REC score

Those looking for safe avenues for their money can invest in the 15-year bonds from IRFC and/ or REC as the rates are attractive.

These two offers also have the highest credit rating of AAA by CRISIL, CARE, and ICRA.

IRFC offers 8.44 and 8.88 per cent interest rates to retail investors for bond tenures of 10 and 15 years, respectively. This is slightly higher than the rates of IRFC’s previous tranches this fiscal. REC’s 10 and 15-year rates are the same as IRFC’s. Its 20-year bond offers an interest rate of 8.86 per cent.

Also, the 15-year rates are the highest of all the tax-free bond issuances this fiscal, which have similar credit ratings. Interest on these bonds is not taxed and, therefore, gives better returns than bank fixed deposits.

Most banks offer around a 9 per cent interest rate for deposits over five years. But after tax, the rate drops to 8.3, 7.6, and 6.8 per cent for the 10, 20 and 30-per cent tax brackets (assuming annual compounding of interest and no payout).

The tax-free bond offer from HUDCO has a lower credit rating at AA by CARE. The rates it offers, at 8.54, 8.98, and 8.96 per cent for the 10, 15 and 20-year tenures, respectively, are only slightly better than IRFC and REC. This offer can thus be ignored.

Timing is good

As controlling inflation is the top priority of the RBI, a sharp rise in rates may not come about.

Apart from brief spikes, the 10-year G-Sec yield has hovered around 8.8 per cent for the past several months, even after the repo rate hike in January. Tax-free bond yields are linked to that of Government bonds. Bank fixed deposit rates have also not moved much.

Tax-free bonds are good options if you’ve already reached the maximum limit in your provident fund.

About the companies

REC finances power transmission, distribution and generation projects across the country.

The company’s loan book at end-December stood at ₹1.42 lakh crore, and it posted a net profit growth of 22 per cent for the April-December 2013 period. IRFC is the financial arm of the Indian Railways. The minimum investment in the bonds is ₹5,000.

(This article was published on March 2, 2014)
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