Lucknow Municipal Bonds: Who should invest in municipal corporation bonds? Pros and cons compared

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Updated: Dec 05, 2020 11:37 AM

Municipal bonds are highly liquid. So if you are strapped for cash and need a quick buck, you can trade them on the secondary market without incurring any tax penalties.

higher inflation, household income, expenditure, economic growth, consumer sentimentHigher inflation is believed to be one of the major reasons behind the shrinking household income.

The Rs 200 crore municipal bonds issue of the Lucknow Municipal Corporation (LMC) was listed at Bombay Stock Exchange this week. The Bell ceremony was attended by Uttar Pradesh Chief Minister of Uttar Pradesh Yogi Adityanath at the National Stock Exchange in Mumbai. After Lucknow Municipal Bonds, more municipal corporations of Uttar Pradesh are expected to announce their bonds issue.

According to S Ravi, Former Chairman of Bombay Stock Exchange (BSE) and Managing Partner at Ravi Rajan and Co, Lucknow municipal bond is a good step for encouraging the bond market.

“More and more corporations can follow suit and can be an avenue for raising funds. The bond market deepens with such issuances which is the need of the market. However, this bond is rated AA which reflects well about the corporation, Ravi told FE Online.

“BSE has taken a good initiative and is a prestigious issuance on the bourse. Such issuance brings a lot of disclosures and moves towards transparency. Chief Minister of UP himself getting involved shows that the state is committed to this cause. The bonds once redeemed will also encourage bondholders to invest in such bonds in the future,” he added.

ALSO READ | Lucknow Municipal Bonds Listed: CM Yogi Adityanath rings bell at BSE; bonds to fetch 8.5% interest

Despite the praises, there are genuine investor concerns over municipal bonds like – Is it a good investment option? Who should invest in municipal bonds? What returns one can expect from municipal corporation bonds etc. Rachit Chawla, CEO & Founder, Finway FSC, answered these questions in an interaction with FE Online.

Who should invest in municipal bonds?

Chawla said that municipal bonds have very low volatility compared to stocks, so they are the right investment opportunity for you if your risk appetite is low.

Municipal bonds investment: Pros and cons

Let’s look at the pros first.

According to Chawla, the municipal bonds are free from federal, state or local taxes. This allows growth to compound quicker.

Also, municipal bonds are highly liquid. So if you are strapped for cash and need a quick buck, you can trade them on the secondary market without incurring any tax penalties.

However, there are some cons of investing in municipal bonds also

Chawla said, “Since municipal bonds are a relatively conservative investment, the yield is low and they may not be able to beat inflation over the long term. This means that the money you’ve invested in bonds may be worthless in buying power in a few years from now than it is now.”

Secondly, the bonds lose value as the interest rate goes up. This means that you might have to settle trading the bonds for less than face value.

“If the municipality goes belly up, you might end up losing your principal and interest payments. Though, it must be said that this is quite rare,” he said.

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