Tax-free bonds are the only instruments which are truly tax free and will carry that status till maturity as it was approved by parliament. There is interest amongst investors in these bonds especially after the budget, when dividend from preference shares started getting taxed, as per tax slab.
After the debacle of Infrastructure Leasing & Financial Services (IL&FS) in 2018, the magnitude of defaults increased as names with good credit ratings joined the list of defaulters. This spooked bond investors’ sentiment further.
Investing in SIB Tier 1 bond that yields 13.75 per cent could be a good investment now given the fact that SIB has a good track record and has been reporting profit quarter after quarter.
Post IL&FS default, it is prudent to invest in securities that are issued by central government or public sector enterprises. We suggest short maturity tax-free bonds. The bonds are listed on the stock exchanges and are available in secondary market as well.
The government has a 56 per cent holding in the company and has been giving timely support that is comforting for investors despite the weak rating of BBB-
A basket of AAA rated government companies, target maturity date and extremely low cost are driving NRIs to this bond. There is seeing substantial interest from NRI families visiting India from London, Singapore and Dubai.
It is important that investors are clearly informed about the risk-return profile of the product so that there are not many negative surprises. Industry experts say the product will give the option to investors to match their goals with maturities of the underlying bonds.
There is safety and no credit risk in both GOI bonds. In addition, investors earn a good 100-125 basis points higher than bank deposits.
Factors such as management, annual accounts, rating and past track record of the company should be looked at before investing. Only if you have the ability or resources to analyse company financials is it worthwhile to invest in company deposits.
There are two prominent risk attached to NCDs. One is repayment of principal and interest and second is liquidity in the secondary market. I will suggest only AAA-rated securities with strong management such as TATA Capital, M&M Finance, L&T Finance, Bajaj Finance, HDFC and LIC housing Finance. Investors should also be aware of risks associated with NCDs.