Category: Fixed Deposits

The last few days saw 4 companies announce the second tranche of their tax free bonds, and with the exception of HUDCO, the other three have identical interest rate and maturity periods.

The interest rates on the second tranche has gone down when compared with the first tranche and that’s because the interest rate on G-Secs have gone down between the time the first tranche was issued and now.

There is only one company that issued bonds earlier and hasn’t come out with a second tranche and that’s IIFCL. They were the only one to have a 20 year term so none of the bonds presently in the market (or to be issued shortly) have a 20 year term.

Here are the details of all the 4 tax free bond issues that are either open now or will open shortly.

Issuers	Open and Close Date	CARE Credit Rating	10 years Retail	15 years Retail	20 years Retail	Interest Payment Date
HUDCO Tranche 2	Feb 18 2013 – Mar 15 2013	AA+	7.53%	7.69%	NA	Â
PFC Tranche 2	Feb 25 2013 – Mar 15 2013	AAA	7.38%	7.54%	NA	Â
REC Tranche 2	Feb 25 2013 – Mar 15 2013	AAA	7.38%	7.54%	NA	Â
IRFC Tranche 2	Feb 25 2013 – Mar 15 2013	AAA	7.38%	7.54%	NA	Â

These are all reasonably safe issues to invest in, and I think even with the lowered interest rate are useful for people in the 30% tax bracket. You can spread your money in two or more issues to diversify since they are so identical in nature. If you have any other questions please leave a comment, and I’ll answer them.

REC is the third company that I’m going to write about that has issued a second tranche of tax free bonds. PFC and HUDCO were the first two.

REC had also released the first tranche of its tax free bonds earlier and like the other companies, it has lowered the interest rates on its second tranche due to the lowering of the interest rates.

Here are the issue details from the second tranche of REC tax free bonds.

Option	Tranche- II Series 1	Tranche- II Series 2
Tenor	10 years	15 years
Minimum Investment	Rs. 5,000	Rs. 5,000
Coupon Rate for Retail Investors	7.38%	7.54%
For Others	6.88%	7.04%
Interest Payment	Annual	Annual

Credit Rating of REC Tax Free Bonds

CRISIL has given this issue its highest ‘CRISIL AAA’ rating, and CARE has also given this issue its highest ‘CARE AAA’ rating.

Open and Close Date of REC Tax Free Bonds

The issue opens on February 25th 2013, and closes on March 15th 2013.

Listing of the Bonds

The bonds will list on both the NSE and the BSE, and will start trading shortly after their issue.

Dematerialization and Physical Form

If you have a Demat account then you can buy these bonds in Demat account but it is not necessary to have one to own these since you can also subscribe to these bonds in the paper form. You can only trade in them in Demat form though.

Security and Safety

I feel that all these bonds coming out are fairly secure in nature but it is always good to spread around your money and not invest all of it in just one issue. Currently, there are 4 issues open so you can split your money in two or three of them.

Conclusion

I’ll keep this post short because there is not a lot new that I have to say other than what I’ve already written in other reviews but since a lot of people read one and not the others, I’ll just repeat that since interest rates are coming down, and these bonds may not be in existence next year onwards, it makes sense for people in the 30% tax bracket to have these as part of your portfolio.

If you have any other questions, please leave a comment, and I’ll answer them.

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Just a few days ago PFC announced their tax free bond issue, and now HUDCO has also announced the second tranche of their tax free bond issue.

The issue structure is similar to the earlier one but the interest rate is lower than the first tranche. This is because the interest rates on these bonds is tied to the interest rate on G-Secs and those yields have come down since the issue of the first bond.

The rate is still however slightly higher than those of the second tranche of PFC tax free bonds.  The issue is also rated one notch lower than those of PFC. It is rated ‘CARE AA+’ from CARE and ‘IND AA+’ from IRRPL.

Option	Tranche- II Series 1	Tranche- II Series 2
Tenor	10 years	15 years
Minimum Investment	Rs. 5,000	Rs. 5,000
Coupon Rate for Retail Investors	7.53%	7.69%
For Others	7.03%	7.19%
Interest Payment	Annual	Annual

HUDCO Tax Free Bond Open and Close Date

This issue opens on the 25th February 2013 and closes on March 15 2013.

Interest Payment

There was a question on the previous post about how the interest will be paid, so I’m adding the answer to that in this post as well. The interest will be paid annual, and there is no option of getting the interest reinvested in the bond like you can do in a fixed deposit. At the time of maturity you get interest for the final year plus whatever you initially invested in the bonds.

Listing of Bonds

This doesn’t mean that your money is locked in the bond for 10 or 15 years as these bonds will be listed on the NSE as well as BSE and you can sell the bonds there at any time. However, the market price of the bonds fluctuate on the stock exchange so you may get a higher or lower price than what you paid at the time of purchase. Presently, interest rates are going down, and bond prices go up when interest rates go down so the chances that the price of these bonds are higher on the stock exchange one year down the road is greater than the chance of their price being lower than the face value.

Who is a retail investor?

A retail investor is an individual or a HUF who invests less than Rs. 10 lakhs in this bond. If you buy the bonds from the stock exchange then you won’t get the additional interest that is available to the retail investor.

How can I buy the bond?

If you have a Demat account and a trading account with a broker like ICICI Direct or Edelweiss, then you should be able to buy the bond online itself. It is not necessary to have a demat account to buy these bonds though, and you can also go to a branch of Karvy, ICICI Securities or Axis Capital to buy these bonds. These are the registrars of the bonds so you should have the option to buy the bonds from them, but I’m sure there are other sources where you can buy them as well. Please leave a comment if you have bought or are going to buy these HUDCO tax free bonds from one of the other sources.

Conclusion

I don’t have much to add other than what I said in the post about the PFC tax free bonds, which is the fact that this is a good interest rate for people in the 30% bracket, and these bonds may not even exist next year so it is probably a good idea to have some part of your fixed income portfolio in a tax free bond issue, either this or any of the other ones. You might also want to diversify and buy the bonds from two or three different issuers since their terms are so similar.

Click here to download the application form

Related articles

• PFC India Tax Free Bonds – 2013

PFC is the latest company to announce tax free bonds, and their issue will start on Monday February 18th 2013, and close on March 15 2013.

Interest rates have been gradually coming down on these tax free bonds since last year and I believe the current issue from PFC has the lowest interest rate of any tax free bond issued since last year.

Option	Tranche- II Series 1	Tranche- II Series 2
Tenor	10 years	15 years
Coupon Rate for Retail Investors	7.38%	7.54%
For Others	6.88%	7.04%
Interest Payment	Annual	Annual

To be fair, this is not all that lower than the 7.69% being offerred by IIFCL for the same duration, but the trend is clearly downwards, last year all the tax free bonds had a 8 handle for retail investors in the 10 year range.

The bond is rated ‘[ICRA] AAA’ by ICRA,   ‘CRISIL AAA /Stable’ by CRISIL  and ‘CARE AAA’ by CARE, and will be listed on BSE.

Who is a retail investor?

Like other bonds, the definition of retail investor is the same in this issue as well, and an individual or HUF who invests less than Rs. 10 lakhs falls under this category.

The retail investor will get a 0.50% higher interest rate than other investors, but that is only available to people who directly subscribe to the issue and once you buy the bond from the secondary market you no longer get the 0.50% extra interest rate.

Conclusion and Interest Rate Direction

For a retail investor in the 30% tax bracket, these are still good debt options because the bonds listed on the market are trading at higher than face value, and you can use these bonds to form a part of the debt portion of your portfolio. The interest rates have been going lower in the past couple of years, and it is likely that it continues to go down in the near future as well, so it makes sense to lock these rates for the long term while you still can.

Click here to download the application form

Related articles

• Should you break a fixed deposit to buy a debt mutual fund?
• Smart investors make ‘dirty’ gains in tax-free bonds
• Tax-free bonds may get the axe

I have missed a lot of Suggest a Topic comments in the past month or so and I’m going to try and address all of them in the next few days.

The first one is from Colin that talks about breaking a fixed deposit and getting into a debt mutual fund. Here is the comment for context.

Colin January 9, 2013 at 9:26 pm [edit]

Let me talk about some parameters that I would like to keep in mind while making this decision.

1. Penalty and reduced interest rate: When you break a fixed deposit, you get penalized in two ways:

• Usually a longer maturity fixed deposit gets a higher interest rate and lower one gets a lower rate, so when you break a 5 year fixed deposit in one year, you will get the reduced rate for that year. So, you have to consider what’s the reduced rate you will get because of this.
• Then there is a penalty which is usually one percent on that reduced rate so you will get a lower rate on the already reduced rate which is the return you will now get.

2. Tax Rate: Take the above rate of return, and tax it at 30% if you are in that bracket, and see what’s your net return. If you are in the 10% bracket or the 20% bracket then I would say breaking the fixed deposit under any condition may not be a good idea because debt mutual fund returns are also taxed at 10% plus if they are long term and at your regular tax rate if they are short term capital gains.

Doing the above two steps will give you a sense of how much money you will get from your fixed deposit now and you can obviously compare that with what you were likely to get if you don’t break the fixed deposit.

3. What is a reasonable assumption for a debt fund return? This is perhaps the most difficult question because if you have a 5 year fixed deposit and you are breaking it then you should have a good level of confidence that in the next five years your debt mutual funds will outperform your fixed deposit. A look at Moneycontrol page for debt funds tells us that in the last 3 years annualized returns of the best debt funds across every category has been 7 – 10%.   With interest rates coming down there is a lot of interest and expectation that debt funds would do better than this but I don’t know how much better and I certainly wouldn’t be very optimistic that they can do a lot better than this.

These are the three things that I would keep in mind, and I don’t particularly like the idea of breaking an existing fixed deposit to do this but that’s just a personal opinion. It might make sense for some one in the higher tax bracket who has all their money tied up in fixed deposits.

Please leave a comment to let me know what you think.

This post was from the Suggest a Topic page. 

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Indian Railway Finance Corporation Limited (IRFC) will be the next company to launch its tax-free bonds this financial year from January 21st. The company plans to raise Rs. 1,000 crores from this issue with an option to retain oversubscription up to Rs. 8,886.40 crores.

This will be the second such issue by IRFC as the company issued tax-free bonds last year also. The issue will close on January 29th, coincidently on the same day on which the RBI is scheduled to announce its monetary policy.

Investors who want to invest in these tax-free bonds for their higher effective yields, I think this is the last such opportunity this financial year. I am saying this because IRFC was among those few companies which filed their final prospectus in December when the yield on the 10-year government securities was higher at around 8.15-8.20%. It has fallen by 35-40 basis points (or 0.35-0.40%) since then.

As the interest rates offered by these companies are linked to the benchmark government securities, the upcoming tax-free bond issues are going to offer lower rate of interest and hence, will be very unattractive.

As most of these tax-free bonds are quite similar in their regular features, here are some of the unique features of this issue:

Interest Rate

IRFC is offering 7.84% per annum for its 15-year option and 7.68% per annum for the 10-year option to the retail investors investing up to Rs. 10 lakhs. Again, the additional incentive of 0.50% will be payable to the original allottees only who invest in these bonds during this offer period. In case these bonds are sold or transferred by the original allottees, except in case of transfer of bonds to legal heir in the event of death of the original allottee, the coupon rates will be revised downwards to the base coupon rates.

As with all of these issues, the interest rate for the other categories of investors, like QIBs, corporates and HNIs, will be 0.50% lower than the above rates offered to the retail investors. For 15 years, it will be 7.34% per annum and for 10 years, it will be 7.18% per annum.

NRI Investment: Like HUDCO tax-free bonds, NRIs can also invest in this issue, but only non-US based NRIs. They can apply for these bonds both on repatriation basis as well as non-repatriation basis. Eligible NRIs can use their NRE/NRO/FCNR/NRNR/NRSR account to invest in this issue but will be required to get a bank certificate made to confirm that the money has been used out of an NRE/NRO/FCNR/NRNR/NRSR account. If the NRI is a Person of Indian Origin (PIO), then it is mandatory to attach the copy of the PIO card.

Other Terms of the Issue

The issue is secured in nature and has been rated ‘AAA’ by CRISIL, ICRA and CARE. The bonds will get listed within 12 working days post closure of the issue on both the national exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Like its first issue last year, IRFC has fixed October 15th as the interest payment date for this issue as well. The investors have the option to apply for these bonds either in the demat form or physical form and thus, demat account is not mandatory to apply for these bonds.

40% of the issue is reserved for the retail investors, another 20% of the issue is reserved for the high net worth individuals (HNIs) i.e. for the individual investors investing above Rs. 10 lakhs. 20% of the issue is reserved for the institutional investors and the remaining 20% is for the corporate investors.

The minimum amount of application is Rs 5,000 with face value of Rs 1,000 per bond. The allotment will be made on first-come-first-serve basis.

About IRFC

Indian Railway Finance Corporation Limited (IRFC) is a wholly-owned public sector undertaking (PSU) and works as a financial arm of Indian Railways. It is also registered with the RBI as Infrastructure Finance Company-NBFC (IFC-NBFC). IRFC has strong asset quality zero gross and net non-performing assets (NPAs) as on March 31, 2012.

The proceeds raised from the issue will be utilised by the company towards financing the acquisition of rolling stock that will be leased to the Ministry of Railways and for funding other projects approved by the Ministry of Railways.

As mentioned above, interest rates have fallen by around 0.35-0.40% in the last few days and going by this trend, the upcoming issues of tax-free bonds will offer lower rate of interest. As much anticipated, if the RBI decides to cut interest rate this time on January 29th, the bond yields should fall more from these levels.

So, it is highly recommended now for the investors in the higher tax brackets to use this opportunity to invest their money either in the ongoing HUDCO tax-free bonds which offer the highest interest rates or in this issue which is rated higher at ‘AAA’.

Click here to download the application form

Since interest rates are fairly high these days, the 5 year tax saving fixed deposit is also a good option for people who want to save using the 80C section. (Read: Section 80C Tax Saving Infographic)

This has a lock in period of 5 years right now, and there are several banks that give you more than 9% on your deposits, and an additional 0.50% for senior citizens in most cases.

The highest rate I could find was City Union Bank which has revised their rates just two days ago, and offer 9.50% on tax saver fixed deposits.

Here is a list of the top tax saver fixed deposits that I could find. If you know of a bank that offers more than these then please leave a comment and I’ll update the table.

Bank	Interest Rate
City Union Bank	9.50%
Deutsche Bank	9.50%
TamilNad Mercantile Bank	9.25%
State Bank of Travancore	9.00%
IDBI Bank	9.00%
Indian Overseas Bank	9.00%
Vijaya Bank	9.00%
Bank of Baroda	9.00%
State Bank of Hyderabad	9.00%
South Indian Bank	8.75%
SBI	8.75%
Karur Vysya Bank	8.75%
Bank of Maharashtra	8.75%
J&K Bank	8.50%
Central Bank of India	8.50%
Kotak Bank	8.50%
Canara Bank	8.50%
Punjab National Bank	8.50%
ICICI Bank	8.50%
Allahabad Bank	8.50%
Axis Bank	8.25%

Updates:

• Added Deutsche Bank per Vimal’s comment.
• Added TamilNad Mercantile Bank per Vijay’s comment and corrected rate for SBH per Mohan AV’s email. 

There have been four tax free bond issues so far in this financial year, and in this post I’m going to compare the main features of the bonds so we can take a look at how different they have been from each other in terms of tenor and rate of interest offered or the credit rating of these bonds.

This post will also serve as a calendar like the one we had last year so there is only place where you can see a quick list of all the tax free bonds, and can click through to the individual reviews.

I have taken the credit rating of CARE only because as far as I remember they have been rating all issues since last year, and there has been no variance between the credit raters themselves, so just looking at one that has rated all bonds does provide sufficient credit rating information in my opinion.

 

Issuers	Open and Close Date	CARE Credit Rating	10 years Retail	15 years Retail	20 years Retail	Interest Payment Date
HUDCO Tranche 2	Feb 18 2013 – Mar 15 2013	AA+	7.53%	7.69%	NA	Â
PFC Tranche 2	Feb 25 2013 – Mar 15 2013	AAA	7.38%	7.54%	NA	Â
REC Tranche 2	Feb 25 2013 – Mar 15 2013	AAA	7.38%	7.54%	NA	Â
IRFC Tranche 2	Feb 25 2013 – Mar 15 2013	AAA	7.38%	7.54%	NA	Â
HUDCOClick here to read review	Jan 9 2013 – Jan 22 2013	AA+	7.84%	8.01%	NA
IIFCLClick here to read review	Dec 26th 2012 – January 11th 2013	AAA	7.69%	7.86%	7.90%
PFCClick here to read review	Dec 14th 2012 –	AAA	7.69%	7.86%	NA
RECClick here to read review	Dec 3rd 2012 – Dec 10th 2012	AAA	7.72%	7.88%	NA

As more issues get declared, I will update this list and include other issuers. Please leave a comment if you want to see any other information about them, or if you see any errors.

HUDCO is the latest company to announce its tax free bonds issue, and there will be two series – one with a tenor of 10 years, and another one with the tenor of 15 years.

HUDCO Tax Free Bonds Open and Close Date

The issue is going to open on the January 9 2013, and will close on January 22nd 2013, and you can apply for these bonds in the Demat or the physical format.

The bonds will list on the NSE so if you wanted to trade them then you need to have them in the Dematerialized format.

Terms of the HUDCO Tax Free Bond Issue

These bonds have similar terms to the ones issued earlier by IIFCL, PFC and REC and the table below lists down some of the main ones.

HUDCO Tax FREE Bonds Options	Series 1	Series 2
Tenor	10 years	15 years
Interest Rate – Retail Investors	7.84%	8.01%
Interest Rate – Other Investors	7.34%	7.51%
Face Value	Rs. 1,000	Rs. 1,000
Minimum Investment	Rs. 5,000	Rs. 5,000

Can NRIs invest in these bonds?

Like the IIFCL issue, NRIs can invest as retail investors or in the other category for the HUDCO tax free bonds.

Credit Rating of the Issue

This issue has got a slightly lower rating than the other tax free bonds as CARE has rated this issue AA+ whereas it had rated the other three issuers as CARE AAA.

How much of a difference does this make? I honestly can’t give this much importance. As I’ve said several times earlier, the best way to diversify risk from your investments is to spread them across different instruments and it is very hard for even experts and auditors to predict trouble, let alone individual investors.

HUDCO is giving a slightly higher rate than other issuers for the same bonds, and there is not much more you can expect from these bonds where the interest rate is capped as it is.

Do these bonds have a step down feature?

Step down feature is where the interest rate on the bonds bought by retail investors come down to the other categories if they are bought from the stock market. All bonds that have been issued this year have the step down feature including this one.

Who is a retail investor?

Resident individuals, NRIs and HUFs who invest less than Rs. 10 lakhs in this issue will come under Category IV – Retail Investors, and will get an additional rate of interest of 0.50%.

Conclusion

As I’ve said earlier, these tax free bonds are a good option for someone in the 20% or 30% tax bracket and they are quite close in their terms of issue, so it doesn’t really matter which one you choose from. Ideally you should select two or three different ones so if something does go wrong with a particular company, you don’t have all your money invested in it.

It is likely that the interest rates are going to come down in the next month or so and if you wanted to invest in these bonds then you should look to choose one and put your money in them quickly.

Click here to download the application form

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

After REC and PFC, IIFCL will become the third company to launch its tax-free bonds this financial year from December 26th. But, unlike REC and PFC, this will be IIFCL’s first issue of tax-free bonds as the company did not have any such issue last year. The issue will close on January 11th.

The company plans to raise Rs. 1,500 crores from the issue with an option to retain oversubscription up to Rs. 9,215 crores.

Despite of the fact that different companies are issuing these tax-free bonds, still as per the CBDT notification, they are bound to keep all of the terms quite similar to each other. There are few terms which are different.

What’s different or unique in this issue?

20 Year Option: IIFCL is the only company which has been allowed to issue tax-free bonds with an additional option of 20 years along with 10-year and 15-year options. IIFCL is offering 7.90% per annum for its 20-year option.

NRI Investment: Also, REC and PFC did not allow NRIs to apply for these bonds during their offer period. But, NRIs can participate in the IIFCL issue. They can apply for these bonds both on repatriation basis as well as non-repatriation basis.

Terms of the Issue

Apart from the 7.90% p.a. 20 year option, IIFCL will pay 7.69% and  7.86% per annum for the 10 year and 15 year options respectively. These rates are applicable for the Retail Investors category only and all other investors will get 0.50% p.a. less i.e. 7.40%, 7.19% and 7.36 for QIBs, corporates and HNIs for 20, 10 and 15 years respectively.

Again, the additional incentive of 0.50% will be payable to the original allottees only who invest in these bonds during this offer period. In case these bonds are sold or transferred by the original allottees, except in case of transfer of bonds to legal heir in the event of death of the original allottee, the coupon rates will be revised downwards to the base coupon rates.

The investors have the option to apply for these bonds either in the demat form or physical form and thus, demat account is not mandatory to apply for these bonds.

The issue is secured in nature and has been rated ‘AAA’ by CARE, ICRA and Brickwork Ratings. The bonds will get listed only on the Bombay Stock Exchange (BSE) and that too, within 12 working days post closure of the issue.

The minimum amount of application is Rs 5,000 with face value of Rs 1,000 per bond.

40% of the issue is reserved for the retail investors, another 30% of the issue is reserved for the high net worth individuals (HNIs) i.e. for the individual investors investing above Rs. 10 lakhs. 15% of the issue is reserved for the institutional investors and the remaining 15% is for the corporate investors.

About IIFCL

India Infrastructure Finance Company Limited (IIFCL) is not a well known company among the investors as it is a relatively new company to have come into existence. IIFCL is a wholly-owned company by the Government of India, which got incorporated in early 2006. It has been created with an objective of providing innovative financing solutions to promote and develop world class infrastructure in India.

As per S. K. Goel, the Chairman and Managing Director of IIFCL, this issue might be the last such issue from IIFCL as the Finance Ministry is not too happy with the Government losing huge tax revenue with their tax-free status. If this is the case, then the investors in the highest tax brackets should not wait too long for the other issues to invest in.

Click here to download the application form