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Old 26th October 2015, 21:13   #1
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Default The Fixed Income Products Thread

We have dedicated threads discussing finance related topics like:
1) Credit Card Thread
2) Mutual Fund Thread
3) Stock Market Thread
4) Income Tax Thread

but I could not find a dedicated thread on fixed income products like:
1) Fixed Maturity Plans
2) Senior Citizen's Saving Scheme
3) Recurring Deposits
4) Debt Funds
5) Tax Free Bonds
6) Corporate FDs
7) Corporate NCD
8) Liquid Funds (not sure if these would qualify as fixed income but I am told they are)
9) ......

With that intent am creating this new thread wherein we could discuss about the various above mentioned instruments and more and see how we could benefit from the same as well.

We have had a recent flow of Tax Free Bonds (TFBs) which I was interested in and did not find a thread here so thought of creating a new one and then thought to expand it to cover all fixed income products.

I am currently invested in TFBs which were issued in 2012 and am contemplating investing in the issue of REC which opens up tomorrow. Any views/opinions on this?

I personally like Tax Free Bonds from the above list since they offer a good rate of return but would like to hear from the community as well, what are their views on this (or other instruments) and where do they invest and why?

Cheers,
S
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Old 26th October 2015, 21:36   #2
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Default Re: The Fixed Income Products Thread

Tax free bonds are good, but the current interest rates are not too encouraging. Few years down the line if interest rates increase, you are stuck.

Also, I believe fixed income products should always be only part of your portfolio, the other part being stocks or equity mutual funds. I usually use fixed income products to park money when equities are overvalued, or for planned expenses, e.g. buying a new car

Though not truly a fixed income product, arbitrage funds too must be considered here. These give more or less similar returns to ultra short term debt funds, but have huge tax benefit as one year investment is considered long term (for capital gains calculation) compared to debt funds.

For the sake of completeness, you should also consider EPF and PPF.

Last edited by k36 : 26th October 2015 at 21:39.
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Old 26th October 2015, 21:49   #3
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Default Re: The Fixed Income Products Thread

Even I am looking at subscribing the REC bond issue. Some one told me they give interest of close to 7% tax free which means c10% on a pretax basis (for my tax slab).

But my father told me that this would block my money for 10/15/20 years depending upon the maturity you choose. I just wanted to check if that is the case? I have some free cash and am thinking of putting it in the REC issue but the thought of them being blocked for >10 years is making me hesitant.

Can these bonds be sold - say after 1-2 years? I read that the bonds will be listed on BSE but is there sufficient liquidity for such bonds?

Any pointers would be helpful!
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Old 26th October 2015, 21:56   #4
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Default Re: The Fixed Income Products Thread

Corporate FDs:

Stay away from them. Telling this from my experience.

I had invested in Jaiprakash and Unitech FDs for the period of three years and till date I have not received the principal back - forget the interest. Company FDs are not covered by insurance unlike bank FDs where at least we can get back 1 lakh if the bank fails. If the company fails, we are at their mercy.

The above mentioned companies have told Company Law Board that will pay and seek extension for repayment but are not keeping their word.
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Old 26th October 2015, 22:31   #5
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Default Re: The Fixed Income Products Thread

Before investing in corporate FDs, one should check their credit rating. I have some money in HDFC Ltd., Mahindra Finance and Shriram Transport Finance. Touch wood, all these 4 years they have been extremely diligent and prompt in paying both monthly / quarterly interest, and principal on maturity.
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Old 26th October 2015, 22:51   #6
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Default The Fixed Income Products Thread

And what about the NSC and KVPs. I recently learnt that many people buy every month a fixed amount of KVP to plan for retirement. The idea is that after the maturity period they will get a fixed income every month.

Then there is the famous post office MIP. Again a fixed income plan used by a great number of people till today. Till sometime back the product was very attractive but not anymore.

I think we should add these also in the list.

Last edited by pgupta : 26th October 2015 at 22:55.
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Old 27th October 2015, 19:17   #7
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Default Re: The Fixed Income Products Thread

Honestly speaking, investing in the debt market is a lot more complicated that investing in equities. If you will recollect, the sub prime crisis in the USA was triggered by a debt instrument, viz. the securitsed home loans that were not of investment grade.

And unlike the equities market where diversified large cap mutual funds frequently out perform the broader market indices like the Sensex and the Nifty. over a period of time, this is not the case with debt market mutual funds.

Unless one has a very clear understanding of macro economics coupled with regular monitoring of credit rating of the underlying investments, the risk reward ratio is skewed against the ordinary investor who chooses to enter through debt mutual funds.

The recent Amtek Auto episode where a two JP Morgan Schemes took huge hits is a case worth recalling when considering investing in the debt market.
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Old 15th December 2015, 22:00   #8
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Default Re: The Fixed Income Products Thread

Hello,

NHAI has come out with tax free bonds which opened up for subscription today. It is a pretty large issue compared to some of the earlier TFB issues and hence has good chances of allocation (as per online reviews). You could read more about the bond details on economictimes and livemint.

The NHAI issue has two series of 10- and 15-year tenures which offer 7.39% and 7.60% a year, respectively, for retail investors.

While me and some colleagues were discussing about the idea to invest in these bonds, one of them pitched for PPF and said that it might be better to invest in PPF versus the bonds since the interest is compounded and the principal amount is also exempt from tax every year. We could not arrive at a final conclusion on which is better over the other so I decided to turn to my faithful TBHP community and seek advice from folks here.

Which one is better, PPF or tax free bonds? What about a middle ground, invest in bonds and every year when you get the interest, move that to your PPF account?

Please share your views.

Cheers,
S
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Old 15th December 2015, 23:28   #9
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Default Re: The Fixed Income Products Thread

Tax free bonds are trad able ... but the volumes are limited.

i.e. You ll get your money out, but it ll take a few days.

Also, although there is a technical lock in for Tax free bonds, but since they are trading on NSE/BSE, the lock-in is not actually there.

If the interest rates fall, you ll benefit a lot as you can sell your bond for a premium. If rates increase, you ll have to sell at discount if you sell.
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Old 16th December 2015, 01:49   #10
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Default PPF - A good option

PPF has liquidity issues. One can opt loan after some time but it is hardly comparable to other liquid instruments.
However for those who can hold, PPF is indeed a good option. Max investible amount is 1Lac.
Now nearly all banks operate PPF a/c. I have in ICICI which helps with private sector banking efficiency vs archaic post office of yore.

I have good experience of Company FDs of Muthoot and Sriram Transport Finance. No hassles with monthly payouts.

Right now studying exchange tradeable bonds.

My two cents..
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Old 16th December 2015, 08:09   #11
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Smile Re: The Fixed Income Products Thread

Quote:
Originally Posted by sukhoi View Post
Which one is better, PPF or tax free bonds? What about a middle ground, invest in bonds and every year when you get the interest, move that to your PPF account?
IMHO, PPF is far more better that the tax free bonds. To look at it, you can liquidate the tax free bond after the 10th year, whereas in PPF you can liquidate after the 4th year. Not entire amount though. The post tax returns of PPF is 8% + whereas tax free is less than 8%. PPF is subjected to political interference in deciding the interest rates whereas tax free bonds are not.

I have been observing the interest yields on the tax free bonds have been falling rather drastically than desired. I have L&T infrastructure bonds purchased in 2011 where interest yields are 11%
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Old 16th December 2015, 10:17   #12
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Default Re: PPF - A good option

Quote:
Originally Posted by sindabad.sailor View Post
Max investible amount is 1Lac.
.
Now its increased to 1.5 Lacs. Also the Govt is thinking of reducing the interest rates on PPF. But still PPF is the first tax saving instrument which you should utilise before investing in other instruments. The principal of 1.5 lacs invested each year is deductible from your taxable income. The interest earned is tax free,and upon maturity the entire sum is non taxable. Besides it cannot be attached in case you default in any of your business or loans.
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Old 17th December 2015, 21:32   #13
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Default Re: The Fixed Income Products Thread

Quote:
Originally Posted by sindabad.sailor View Post
Right now studying exchange tradeable bonds.
@sindabad.sailor - do share your learnings from exchange tradeable bonds. Not aware of what these are and would look forward to hear from you on this.

Quote:
Originally Posted by ghodlur View Post
To look at it, you can liquidate the tax free bond after the 10th year, whereas in PPF you can liquidate after the 4th year.
@ghodlur - Tax free bonds list on the exchange and are tradeable and hence could be liquidated at any point of time post listing. Are you referring to some thing else?

Quote:
I have been observing the interest yields on the tax free bonds have been falling rather drastically than desired. I have L&T infrastructure bonds purchased in 2011 where interest yields are 11%
Are these tax free bonds (wherein interest is tax free) or infrastructure bonds wherein the amount invested in these bonds was exempt under Section 80C I think. If these are tax free bonds then you made a very good decision to acquire them @ 11 % indeed.

I did some quick calculations and found the following:
Scenario I
Invest 1 lakh in PPF and it becomes 3 lakh 49 thousand odd @ end of 15 years (no further investments done in next 14 years just for simplicity sake)

Scenario II
Invest 1 lakh in TFB and we get 2 lakh 14 thousand at end of 15 years (simple interest)

Scenario III
Invest 1 lakh in TFB and then annually invest the interest payout of 7.6% in PPF account (in case of NHAI bonds, the interest would be paid out on April 1). One would end up with 3 lakh 36 thousand odd. This would require some discipline too (or automation) to move funds from interest payout to PPF account

In all scenarios, in terms of returns offered, PPF wins hands down - the power of compounding. Not to forget that in case of PPF, the initial 1L would have got a tax break as well.

But should one invest in PPF !! My only concern when it comes to PPF is that it is not a very liquid investment and lock-in is considerable compared to say TFBs, but the returns are very good (compounding). In PPF one can deploy maximum of 1.5 lakhs across accounts (self and where one is guardian).

I would personally feel that one should max out PPF if one is okay with the money lock in and then if still has surplus funds definitely consider tax free bonds as another option. If however one is looking at investing in PPF from a tax saving perspective alone then considering other deductions like insurance premium, home loans, contribution from salary towards PF etc. would result in not requiring to invest entire 1.5L in PPF.

I personally prefer them as debt instruments instead of FDs wherein the post tax returns are lower.

Cheers,
S
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Old 7th January 2016, 19:57   #14
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Default Re: The Fixed Income Products Thread

Hello all,

Happy New Year to everyone. Feel 20, look 16... Happy 2016.

Did not know that bankers and Bollywood both made a beeline for tax free bonds and invested in them. Read more about it here
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Old 8th January 2016, 09:49   #15
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Default Re: The Fixed Income Products Thread

There is another category of investment, which is tax free (not risk free) are Arbitrage Funds. The returns here are more in tune with FD returns (lower pre-tax, higher post-tax) and are non-taxable if you hold for over 12 months (recent change in tax laws).

Thus even though there are essentially equity based, and taxation is the same, they have many characteristics of fixed income funds, in terms of returns, and possibly risk
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