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Investors see between 4% and 7% capital appreciation in their investment within this short span of time
All eyes might be on equities but tax free bonds offered by state-owned companies in the January-March period have silently returned close to stock market gains. Investors have seen between 4% and 7% capital appreciation in their investment within this short span of time.
Towards the end of the financial year, public sector issuers such as NTPC, National Housing Bank (NHB) and Indian Railways Finance Corporation (IRFC) to name a few brought a series of public issuances offering between 8% and 9% coupon broadly for 10,15 and 20 years.
Those bonds offer very attractive rates over a long period. Perhaps, we are going through the peak of interest rates. Even if there is capital appreciation, retail investors should hold it till maturity for higher long term returns. For example, a particular series of NHB bonds which were issued at a face value of Rs 5,000 per bond during the March quarter on Thursday quoted the last trading price of Rs 5,321 in the secondary market, suggesting a capital appreciation of 6.4%. Similarly, NHPC bonds rose on Thursday to an intraday high of Rs 1,072 compared with a face value of Rs 1,000, an appreciation of more than 7%.
The 30-share BSE Sensex has moved up 8% in the last three months. Even though a comparison between equity and debt may not be justified as they are two different asset classes, an investor with less risk appetite can earn good returns in bonds.
In its first bi-monthly policy, the Reserve Bank of India hinted at keeping interest rates unchanged till the time the central bank attains 8% retail inflation as measured by the consumer price index, or CPI.
If the rate of inflation keeps falling, there are rate cut chances, which may begin in 2015. As the country achieves higher pace of growth with falling inflation, interest rates may be cut.
Most of those issuers were AAA-rated, barring HUDCO, which was assigned AA+, one notch lower. But, the government ownership is the key trigger that makes all these a safe investment bet. It does not make sense for investors to exit investments booking profit at this point unless there is a compulsion. In case of selling, investors will attract short-term capital gain tax as per individual income tax slab, which, in turn, will erode absolute returns.
For those who missed the opportunity to invest in tax-free debt securities and are currently planning the same it may be too late. As bond prices moved up pushing yields down, their interest income may fall below 8% annually even if there is tax exemption.
The quantum of dividend shall be Rs 0.0389 per unit. The record date has been fixed as April 03, 2014.
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