For someone looking to invest in bonds, there seems to be too many options to choose from. For a retail investor, the top considerations are the risks involved in the investment and the returns from it.
The surge in infrastructure bonds can be attributed to the tax-saving season. An additional saving of R20,000 is allowed under Section 80CCF and this could help an assessee save up to R6,180 (tax rate @ 30.9%). The returns are pegged at 9%, which are taxable at normal rates and they come with a buyback option after five years. After this period, the bonds become tradeable and one could offload it on the exchange till the maturity period of 10 years. There is also the option of a 15-year maturity where the lock-in is seven years.
On the other hand, tax-free bonds do not qualify as tax-saving investments, but they provide returns that are tax-free. The tenure of these bonds are 10 and 15 years and they offer returns of 8.2%-8.3% per annum. The investor perception towards such bonds has changed to a ?one in a lifetime? kind of annuity. A lot of people have put their PF money in these bonds.
Why tax-free bonds? While the response for tax?free bonds was overwhelming as seen in the case of National Highways Authority of India (NHAI) and, to some extent Power Finance Corporation (PFC), infrastructure bonds saw a relatively lukewarm response despite a higher rate of return.
Further, given that tax-saving bonds were capped at R20,000 for tax benefit, assessees tend to invest only that much and nothing more. The participants in both these category were also slightly different. There were a lot of high net worth individuals who preferred investing in NHAI and PFC bonds; however, they preferred to stay muted on the tax-saving infrastructure bonds counter.
Also the sense of safety that a sovereign organisation is raising funds might be projected in the investors mind. Investors were more comfortable in parking their money with NHAI and PFC rather than SREI or IDFC. But, then again, PFCs play the game from both ends; they are also listed on the equity front and many have burned their hands with their tryst in investing in equities and this could possibly be the reason behind the luke warm response to PFCs as compared to NHAI bonds.
Fund flight from equities. With the equity markets remaining depressed, individuals are taking off money from equities and finding comfort in fixed income instruments, such as bonds. For the corporates too, raising funds from equity market is not the best option at this point, with valuations close to all-time lows. So, they prefer raising funds via the debt market where there are more investors.
Fixed income investments are generally yielding high rates, thanks to the slew of rate hikes by the RBI over the previous year.
Clearly, there are signs of interest rates moderating over the next six months. Given that the interest rates are at their peaks, it makes sense to park a part of your funds in debt; this will also help balance your portfolio appropriately.
Bonding with the best. Choosing the right bond in such an environment is not considered much of a challenge. Most people just look at the returns and lock-in and the company from which such bonds are being offered. Often one misses the rating that is given by a credit rating agency, although these could be revised at a later date based on the default risk that the company carries. As a thumb rule, look at ratings of AA+ and above.
One need not look closely at those options that are common, such as the tenure or the buyback option. However, the response that the issue gets could give you a feel of the liquidity pattern that could exist when one wants to exit. There are only subtle differences between the bond options discussed above; such as taxability, participants, liquidity, returns, risk perception and objective. The rule for any investment is the same: Choose the one that falls within your agenda.
* The writer is CEO & founder of Right Horizons