4 companies issued tax free bonds earlier this year, and all of these listed in the market. These bonds are great for people who are in the 30% tax bracket because their post tax yield is quite high, and since all of these bonds are listed in the market, you can buy them directly from there even if you weren’t able to subscribe to them the first time around.
The only drawback of buying them from the secondary market is that some of them had the step down feature which meant that when you buy them from the market, you get a slightly lower rate of interest than the primary subscriber. NHAI and PFC didn’t have the step down feature whereas the rest did.
I consider all these bonds quite safe in nature, and it is unlikely that any of these companies will default on their bonds.
So, if they are all alike in terms of safety then how do you decide which is the best tax free bond among them? The price, yield to maturity and term can help decide which is the best bond for you and I’ve created a list of all of them below.
| Issuer | Series | Tenor | Original Coupon |
Date | Credit Rating | Â Market Price on July 14 2012 |
YTM |
|---|---|---|---|---|---|---|---|
| REC | 1 | 10 years |  8.13% | March 06 2012 – March 12 2012 | CRISIL AAA CARE AAA FITCH AAA | Rs. 1,050.00 |  7.20% |
| REC | 2 | 15 years |  8.32% | March 06 2012 – March 12 2012 | CRISIL AAA CARE AAA Fitch AAA | Rs. 1,038.56 |  7.67% |
| Indian Railways | 1 |  10 years |  8.15% | Jan 27 2012 – Feb 10 2012 | CRISIL AAA CARE AAA |  Rs. 1,049.83 |  7.26% |
| Indian Railways | 2 | 15 years |  8.30% | Jan 27 2012 – Feb 10 2012 |  CRISIL AAA CARE AAA |  Rs. 1061.90 |  7.39% |
| HUDCO |  1 |  10 years |  8.22% |  Jan 27 2012 – Feb 10 2012 | Fitch AA+ CARE AA+ |  Rs. 1,039.85 |  7.50% |
| HUDCO |  2 |  15 years |  8.35% |  Jan 27 2012 – Feb 10 2012 | Fitch AA+CARE AA+ |  Rs. 1,050.98 |  7.61% |
| NHAI | 1 | 10 years |  8.20% | Dec 28th2011 - Jan 11th 2012 | CRISIL AAACARE AAA |  Rs. 1,076.50 |  7.07% |
| NHAI | 2 | 15 years |  8.30% | Dec 28th2011 - Jan 11th 2012 | CRISIL AAACARE AAA |  Rs. 1,092.00 |  7.26% |
| PFC | 1 | 10 years |  8.20% | Dec 30th2011 – Jan 16th 2012 | CRISIL AAA ICRA AAA | Rs. 1,069.93 |  7.16% |
| PFC | 2 | 15 years |  8.30% | Dec 30th2011 – Jan 16th 2012 | CRISIL AAA ICRA AAA |  Rs. 1,080.47 |  7.38% |
Based on this you can see that the yields for all of these bonds are very similar and I would say it is hard to pick one over the other and say that one is better than the other based on the data that we see here. Although you see some yields higher than the other I am not sure if this is always the case or it is just the day that I took the data for.
Perhaps the best strategy is to buy a combination of these bonds for differing maturities and thus even diversifying your bond portfolio as well.
This post is from the Suggest a Topic page.
Update: Corrected the error where I said all bonds have the step down feature.
Indeed; also another relevant topic for today could be the impact of the upcoming RBI policy announcement tomorrow (28th Jan 2014) on the prices of tax free bonds. Furthermore, how should tax free bond investors restrategize post the RBI policy announcement?
very interesting topic for today market ..
can u re-post ??
Pl mention record date for interest payment due on 15th Oct 2012 for 820PFC2022 tax free bonds as bonds price declined drastically and many investors were cheated because of ignorance
How are they cheated? They will get interest paid to them for the full year by owning it for just one day and people who bought it the next day won’t get any interest paid.
Record date is 15 days prior to date of interest apyment but in case of PFC 820PFC 2022 and 2027 the price of bonds in secondary mkt came down drastically in afternoon session.what is he ideal date as record .The BSe and the broker must mention cuminterest date and xinterest date for the benfit of investor.otherwise it is a cheating business run by the cunning and selfish brokers .
Price of NHAI Tax-Free Bonds touched Rs. 1102 in today’s trade. These bonds got allotted on January 25th and listed for trading on NSE/BSE on February 8th. This implies that these bonds have given its investors a return of 10.2% in around six months’ time.
This is a great return from a ‘AAA’ rated fixed income instrument issued by a wholly-owned government organisation and that too in a high-inflation & high-interest rates scenario.
Thanks Shiv for keeping us updated. 🙂
What’s there in the pipeline in this TFB category?
You are most welcome Amlan!
REC is planning to launch an issue during September-October period. IIFCL might also come during this period only. Nothing official as of now. I’ll definitely share here whenever something comes.
could Manshu or someone clarify two things
1) If I buy NHAI bonds from the market today and they are paying intrest on say Oct 15, will I be eligible to get full year’s intrest, even though I am holding it for say 2 months and someone else , for eg the primary buyer held it for 1o months, so effectively even in bond do you have ex dividend dates like you have in shares whereby the person whose name is in the list before ex dividend gets the dividend. Has Manshu factored all this before making the YTM
2) what forumla does Manshu use to calculate YTM
Thanks in advance
Raj
Hi Raj Sen… I can partially answer your query. Interest Payment Date for NHAI bonds is October 1st every year. Record Date for the payment of interest will always be 15 days prior to the interest payment date. In these bonds, there is an ex-interest date on which the price of these bonds should ideally fall approximately equal to the interest amount.
Yes, if you hold these bonds on the record date, you’ll get the interest payment for the full year but then you’ll incur a notional capital loss on your investment like it happens in case of shares also.
Hi,
Could you please add the Interest paying months also, for each of them.
I am desperately searching for that information, but not able to find it, as I donot have a copy of their prospectus. I remember NHAI pays interest in october of every year, HUDCO I guess in July.
If you could add this info, it would be very helpful to plan investment based on receivables.
Vish
Hi Vish… please find the “Interest Payment Date” of all of these issues in the table provided under this post:
http://www.onemint.com/2012/07/19/tax-free-bonds-mid-year-update/
Longer duration bonds (i.e. 15 year) have high price appreciation potential if interest rates fall significantly.
That’s a good point Ankur and I know you’ve explained this elsewhere but it may be a good idea to expand on that a little here as well.
Manshu:
Not all of them have a stepdown clause. From what I can gather –
IRFC, REC, HUDCO – Have a Step down clause
NHAI – NO stepdown clause
PFC – couldnt figure it out.
In that case I believe NHAI is better isnt it? Assuming you are not trading but want to get the income
You are right Vivek. I apologize for the error.
NHAI and PFC don’t have the step down clause. My oversight. I have corrected it now.
Thanks Manshu for this article, it is very helpful.
I have already diversified my bond portfolio with NHAI, PFC and REC. 🙂
And would like to invest further if such issues are coming in the next few weeks/months. But definitely I would prefer to invest in the primary market.
Hi Amlan… HUDCO bonds have given 11%+ returns since listing whereas REC Bonds have given 8%+ returns from its listing. So, I think it all depends on the demand-supply factors how much gains you are able to make. One needs to be flexible – if opportunity strikes in the secondary markets then one should grab it with both hands.
If not more, you are going to see at least one such issue in this quarter.
IF I remember correctly, you got full allotment on one of these issues, right? No wonder you want to buy it from the primary market, which makes perfect sense of course 🙂
I believe that the coupon rate for the Indian Railways is 8.00% & 8.10% for the 10 year & 15 year bonds respectively. I verified this at BSE’s website: http://www.bseindia.com/cirbrief/new_notice_detail.asp?noticeid={1D28DFD1-D5E3-441D-83C6-1ECF8E1C8642}¬iceno=20120228-27&dt=2/28/2012&icount=27&totcount=29&flag=0
Request you to confirm the same. Thanks!
Hi Anonymous… IRFC offered to pay a higher rate of interest of 8.30% and 8.15% for 15 years and 10 years respectively to the original allottees. If somebody buys these bonds from the secondary markets then the applicable coupon rates are 8.10% and 8%.
Two things that investors need to keep in mind:
1 – Although Manshu has mentioned about the step down intereste rates in the article, the table still shows the ‘old’ intereserate for the three recent issues (REC, HUDCO and Railways). So, check the actual rates before you buy. i guess the rates are 0.15 to 0.3 % lower.
2 – Bond rates include the interest they have accumulated so far since their last interest payout date. For Ex; NHAI and PFC pay interest in october. So, right now their rate includes Rs 40-50 interest also, which you will get in October.
So, you have consider both these before calculating YTM.
Regards,
Bhushan.
dont worry dude, YTMs are based on present value of cash flows, so it does not matter interest is payable monthly, annually or at maturity. Your point will come, if you wanna compare market price of bond.
Bhushan
1. The reason to keep the original coupon rate is that it makes it easier to search for them in sites like ICICI Direct or Edelweiss, but you make a good. I need to see how I can make this table more useful to the readers.
2. I believe these calculations do take care of what you’re saying but I will do them again to double check it.
Thanks.
HI
I would like to purchase tax free bonds of 15 yrs lock in period from market , so which company should i buy and
whether i would be eligble to get tax free returns or no ?
regards
darshan
Hi darshan… There are 5 companies which issued these tax-free bonds last financial year – NHAI, PFC, IRFC, HUDCO and REC. All these are government organisations. All these issues are ‘AAA’ rated, except HUDCO issue which is ‘AA+’ rated. So, all these are safe instruments to invest into. If you intend to keep these bonds till maturity then you should buy bonds with the highest yield to maturity. If you intend to sell these bonds after some time in the market then you should invest in bonds with highest liquidity.
Also, you will be eligible to get tax-free returns if you buy these bonds from the markets but the returns would get lower with IRFC, HUDCO and REC bonds.
Hi Manshu:
The step down feature is only on REC and Hudco bonds. I believe that NHAI and PFC carry the same rates as original allocation even if bought from secondary market.
– Mukesh
HI Mukesh,
Thanks for pointing that out – that was my mistake. My apologies.