Tuesday, September 22, 2015

ARE TAX FREE BONDS 2015-2016 GOOD FOR YOU- a dope ??

The tax free bond days are back. Long term bonds issued now have special significance given the possibility of interest rate cuts and a bond market rally. Coming in the market this week is the NTPC Tax Free Bonds. 
Is it for you?

The Facts

Issues opens on 23rd Sept and closes on 30th Sept

Minimum investment - Rs.5,000/- (5 * Rs.1000/- bonds)

Maximum investments - Rs. 10 lacs (to qualify as retail investor)

Tenure of bond - 10 years / 15 years / 20 years

Interest rates (tax free) - 7.36% for 10 years, 7.53% for 15 years, 7.62% for 20 years

Interest paid - Annual

Cumulative option - Not available

Maturity value - Same as face value + interest due for the last year

Should have and maintain a demat account to buy the bond

What looks good?

The interest rate

Tax free rate
is equivalent to

Taxable rate @ 30% slab (APPROX.)
( The Above NTPC Issue was Over-subscribed and Further Comming Issue is if PFC)

PFC Tax-Free Bonds Issue Update
For Individual Retail Investors -Category IV
Option 1
Option 2
Option 3
Tenure of Bonds
10 years
15 years
20 years
Tax free rate is equivalent to
Taxable rate @ 30% slab (APPROX.) 10.51% 10.76% 10.85%
Long investment period

Lesser reinvestment risk. Short term deposits run this risk as at the end of the maturity period if interest rates had fallen, investor will not be able to reinvest at the same rate

Low risk

Almost no risk, as these are government backed bonds. NTPC is a PSU - Maharatna company and the country's largest power producer.

Fixed regular income

Someone investing Rs. 10 lacs can expect a regular income of Rs.73,600/- every year. So called-No surprises, no risks. 

Interest rate scenario in the economy

With interest rates expected to fall in the future, locking your investments for a high rate may be beneficial. Bond values are likely to go up resulting in reasonable premiums when sold in secondary market.

What doesn't look good?

No cumulative option

No opportunity to create wealth and give power of compounding a chance.

Low liquidity

Although these bonds are liquidatable in the secondary market, expect trading volumes to be thin.

10 years is a long time

The shortest tenure is 10 years. Typical investors in bonds like these, risk averse retirees seeking regular income may find 10 years too long a time to be invested in an illiquid asset. 

Best suited for

People seeking regular income - not capital growth

People in the highest tax bracket - they get the best benefit. If investor is only in the 10% tax bracket or lesser, an FD today may offer better returns.

Investors with low risk tolerance and low risk capacity

Investors who have fully utilised 80C and other tax related savings/investments, need to check this.

How to invest?

Through your demat account. Talk to your stock broker / adviser

Want to know more? 
Please write your queries in comments and I will respond.....FEEL FREE to ask....

-initial write up courtesy,Bhuvana 

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