Should you wait for later tax free bond issues or invest in the REC issue?

by Manshu on December 4, 2012

in Credit

REC is the first company to come out with tax free bonds this year, and I have written about them earlier last week. In that review I said that there is not much difference in bonds from different companies and it doesn’t really matter which company you buy the bonds from.

However, Shiv pointed me to a review of REC bonds by Business Line in which they recommend that you buy these bonds instead of waiting, and their rationale makes sense to me.

The interest rates on these bonds are capped at the maximum G-Sec rate of comparable maturity and BL states that if interest rates were to go down in the near future, something which the RBI could do because of growth slowdown, then the later issues that hit the market will be at a lower rate than the REC issue.

This is akin to what happened this year when the rates are lower when compared to the issues that came out last year. I think that the chances of a rate hike are very unlikely so if you are just procrastinating and don’t have a good reason to wait then go ahead and buy the REC tax free bonds.

Now let me emphasize here that I’m not saying that these bonds are the greatest investment on the planet and everyone should go out and buy them today, there are certainly other options depending on your situation and Ashok has given a good example of one in his situation.

I’m simply stating if you want to buy tax free bonds from the primary market this year,  then it is a good idea to do so now instead of waiting for other issues which might have a better rate. No one knows the future, but the odds of interest rates going lower is a lot greater than interest rates going down.

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{ 4 comments… read them below or add one }

Aashish December 8, 2012 at 2:47 pm

My dad is nearing retirement and is looking at avenues for parking excess money for retirement income. After Annuities, FDs, Post Office savings scheme, MIPs, how do these tax free bonds measure up for extra money available? The monthly income is already addressed and liquidity is not a big deal with this leftover. I feel the interest rates are good – especially since my dad would continue to fall in 20-30% tax bracket for a few years. Since these are traded on the secondary market, liquidity isn’t a big deal. The stability is good as well.

Can someone punch some holes in my theory and play devil’s advocate?

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Manshu December 8, 2012 at 10:44 pm

I think this makes a rather good option, and with the options that you have used up already, it seems to me that there is value in investing in these bonds.

I’m sure someone else will do a better job of playing devil’s advocate but that’s not me as far as these bonds are concerned.

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Shashwat Jain December 10, 2012 at 5:37 pm

These bonds are with a step down clause so less chances of listing gain and capital appreciation would be lesser as compared to bonds which wont have step down clause, when interest rates decline. Advantage of liquidity is negated by step down clause as if one want to sell these bonds after some time he would not get proper price in market. I hope coming bond issues do not have this clause. Out of 4500 crore possible REC not able to raise more than 2500 crore so they might come with another issue.

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Manshu December 10, 2012 at 10:37 pm

I would imagine that all the other tax free bonds also come with a step down feature. As far as I remember, after a certain point, all bonds had a step down feature last year.

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