Personal Finance

HUDCO Tax-free Bonds: Capital safety with good returns

Dhuraivel Gunasekaran | Updated on September 22, 2019 Published on September 22, 2019

Conservative investors can consider buying these bonds from the secondary market

Over the past 12-15 months, a spate of corporate bond downgrades and defaults has made fixed-income investors jittery. Bonds issued by IL&FS, DHFL, Essel Group and Reliance ADA Group were all downgraded sharply. Such downgrades led to sharp erosion in the value of the investment products that held these distressed assets in their portfolio. Mutual funds, insurance schemes, NPS (National Pension System) and EPFO (Employees’ Provident Fund Organisation) were among those that took a hit.

Capital safety has now become a prime concern for retail investors. Investors looking for debt instruments that provide capital safety and decent returns can consider tax-free bonds available in the secondary market. Since these entities are backed by the government, investments in their tax-free bonds enjoy capital safety.

 

 

 

Further, the bonds issued by most of these companies are rated with the highest grade of AAA.

HUDCO tax-free bonds

Conservative investors, including retirees, looking for capital safety can consider buying the tax-free bonds issued by the Housing and Urban Development Corporation (HUDCO) that are available in the secondary market.

HUDCO issued 32 series of tax-free bonds totally with varying maturities of 10, 15 and 20 years in FY12, FY13, FY14 and FY16.

Many series are actively traded on the BSE and the NSE with relatively high yield-to-maturity (YTM) and liquidity.

According to data compiled by HDFC securities’ retail research, five series of HUDCO tax-free bonds, with YTM of 5.4-5.9 per cent, are actively traded on both the exchanges. For instance, the HUDCO N3 series (ISIN INE031A07832), with a coupon rate of 8.1 per cent and residual maturity of 2.5 years, trades with a YTM of 5.6 per cent on the NSE. The daily average traded volume in the series over the past one month was 1,120 units.

Since the interest paid by tax-free bonds are exempt from income tax, the current yield of 5.8 per cent translates to 8 per cent of pre-tax yield for investors in the 30 per cent bracket. This rate is relatively higher than those rates offered by bank fixed deposits currently.

About the company

HUDCO is a wholly government-owned entity, providing loans for housing and urban infrastructure projects in India. It has been conferred the status of Miniratna (category-I public sector enterprise) by the Centre. The company focusses on funding the housing needs of economically weaker sections and low-income group category, along with funding the non-commercial urban infrastructure.

Since its inception, HUDCO has funded 19.34 million dwelling units, about 86 per cent of which belong to the economically weaker sections. The Centre supports by way of allowing access to low-cost funds, extending guarantees, easing various norms, and guiding its broad policies and contours.

HUDCO’s gross non-performing loans stood at 4.5 per cent in FY19. The company’s net NPA stood at 0.5 per cent in FY19. In July 2019, India Ratings and Research affirmed HUDCO’s long-term issuer rating at ‘IND AAA’ with a stable outlook. AAA rated bonds offer a high degree of creditworthiness.

Published on September 22, 2019
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