[sukhoi]

We have another issue of tax free bonds coming up from tomorrow. NHAI is coming out with Tranche II – February 2016 Issue. Details are:
Opens: 24-Feb
Scheduled Closure: 01-Mar
Interest rate: 10 yr bond is 7.29% & 15 yr bond is 7.69%. For Tranche I -December 2015 it was 7.39% & 7.6% respectively
Interest Payout Date: 01-October. For Tranche I it was 01-April IIRC

Read more here.

Amid such volatile times, people are looking for safe options as well and TFBs seem like a very good option.

Cheers,
S

[tejas08]

Nice thread actually.

Just sharing my two cents.

Like someone highlighted, having a balanced portfolio is important. But nowadays a growing trend is about moving towards equity. Too much into equity is bad too unless you plan to keep it well over 7-8 years.

Here's something that I plan on doing in the near future with NSC.

Start with an NSC of 2000 per month. Considering 8.5% interest and the current 5 year maturity, you will get about INR 3007. You have now completed the first cycle.

Second Cycle - Reinvest this INR 3007 alongwith an equal amount from your end every month. Meaning your investment would be a total of INR 6014. Again considering 8.5% interest and the 5 year maturity, you end up with INR 9044.

You think the sum looks small. Add another two cycles as above.

You end up with a Monthly Income of Rs. 81,793 at the end of 20 Years.

Needs a hell lot of discipline to do this, but your Rs. 2000 investment has grown to Rs. 81,793.

This can be done if you have a good 20 years of service life left. Yearly increments are in the tune of 8-10% Minimum average. So this plan is sustainable.

An 8% average inflation would make Rs. 2000 equal to about Rs. 10,224 in 20 years.

So Rs. 81,793 as against Rs. 10,224. You are geared up for a good show.

[GrammarNazi]

The first thing I'd advise any young individual with regular small incomes is, to invest in yourself. Invest in updating your skill set & try developing a saleable product for real consumers.

Study the market demand, supply, utility of product, future market scope.

If all such options are closed, only then would I recommend you give your money to someone else to grow, whichever the product.

Originally Posted by tejas08

...
Start with an NSC of 2000 per month. Considering 8.5% interest and the current 5 year maturity, you will get about INR 3007. You have now completed the first cycle.

Second Cycle - Reinvest this INR 3007 alongwith an equal amount from your end every month. Meaning your investment would be a total of INR 6014. Again considering 8.5% interest and the 5 year maturity, you end up with INR 9044.

...You end up with a Monthly Income of Rs. 81,793 at the end of 20 Years.

Needs a hell lot of discipline to do this, but your Rs. 2000 investment has grown to Rs. 81,793.

(2000 investment that grows to 3k, then ~6k... Apart from reinvesting the returns)

Where this pinches is 2 places :
1) Domestic inflation is much much higher than 8%.
2) 20 years, the world changes so very much that such a discipline with regularity of cash flows is very very rare to maintain.

[sgiitk]

Esp for older folk like yours truly. Even a ten year lock in in Tax Free Bonds may raise some questions about the maturity time. You may be will into your seventies by then.

[tejas08]

Originally Posted by GrammarNazi

(2000 investment that grows to 3k, then ~6k... Apart from reinvesting the returns)

Where this pinches is 2 places :
1) Domestic inflation is much much higher than 8%.
2) 20 years, the world changes so very much that such a discipline with regularity of cash flows is very very rare to maintain.

I do not agree with your 1st point. Inflation in some aspects is higher whereas some other aspects is lower. If you look at the averaged out inflation rate, it stands between 6-7% Y-O-Y.

Even if you consider 10% inflation, Rs. 2000 today would become Rs. 13,455 after 20 years. Also, 20 years is a huge tenure. Nobody and I mean nobody (Not even the biggest financial advising firm / best financial advisor in India) can tell you what's the best amount to have 20 years down the line.

This option is giving you a safe fixed income. Plus every 5 years, you get a chance to review whether you want to increase investment two-fold or three fold.

Try thinking over it, once you have an ECS of Rs. 2000 every month towards investment, do you bother to change it. In fact, we ensure that Rs. 2000 are always their in the account when the ECS date nears. (Example - SIPs).

In this case, the only problem is that there is no ECS. You have to manually do this every month. But it's only a matter of time when this changes too. Post Offices are becoming CBS based and we will soon be seeing online NSCs.

Call me old-fashioned. But I still feel that NSCs can be a great way for fixed Monthly income. All other stuff generally give you a lumpsum amount at maturity.

For needs that are 5, 10, 15 years based, you could try SIPs or PPFs or other stuff which have different lock-in and maturity periods.

[GrammarNazi]

Originally Posted by sgiitk

Esp for older folk like yours truly. Even a ten year lock in in Tax Free Bonds may raise some questions about the maturity time. You may be will into your seventies by then.

lol I guess with the kind of food & air quality and lifestyle, our generation would find it hard to perform very well post age 45.

What say sir, invest 2k per month in developing skill sets, or in some long term disciplined investment ? (Assuming it's the usual 22-25yr old guy, probably just a graduate, earning ~25k/m). It's subjective, still, your wise opinion.

Originally Posted by tejas08

I do not agree with your 1st point. Inflation in some aspects is higher whereas some other aspects is lower. If you look at the averaged out inflation rate, it stands between 6-7% Y-O-Y....

At WPI sure, but domestic inflation that affects a person* who'd consider this investment pattern.

(*I assumed for people planning to start investing 2000/m who want to grow over 20 years, to quite likely to be ones with a monthly income of ~25k, & probably aged below 25.)

Anyway, to each his own.

[AbhiJ]

Originally Posted by sgiitk

Esp for older folk like yours truly. Even a ten year lock in in Tax Free Bonds may raise some questions about the maturity time. You may be will into your seventies by then.

I speak from experience.

You do not have to hold bonds till maturity. If you have patience (1 week or so) you can liquidate bonds via your stock broker on NSE/BSE quite easily. Last year I liquidated 90% of my bonds because I had some urgent requirement.

Say you buy a NHAI 7.5 % Percent Bond today for 10 year period. And the bond interest rates fall 0.5 percent to 7.0 over the next week.

You should technically get a 0.5% * 10 years = 5 percent premium on your bond in the NSE/BSE immediately.

The inverse is obviously also true.

[sukhoi]

Originally Posted by AbhiJ

I speak from experience.
You do not have to hold bonds till maturity. If you have patience (1 week or so) you can liquidate bonds via your stock broker on NSE/BSE quite easily. Last year I liquidated 90% of my bonds because I had some urgent requirement.

Hello AbhiJ,

Could you please advice on the taxation of the capital gains arising from these bonds. My understanding says that if sold within 1 year then it is short term capital gains in which case it is included in income and taxed as per income slab. Alternatively, if sold after one year, it is taxed at 10% without indexation or 20% with indexation, whichever is lower.
Also, if purchased from the secondary market, do we get same coupon rate or it gets reduced?

The last two Tax Free Bonds for current FY are open now, NABARD and IRFC, details as below:
NABARD
Opens: 09-March-2016
Scheduled Closure: 16-March-2016
Interest Rate: 7.29% for 10 years and 7.64% for 15 years
Interest Payout Date: Not known

IRFC Tranche II Issue
Opens: 10-March-2016
Scheduled Closure: 14-March-2016
Interest Rate: 7.29% for its 10-year option and 7.64% for the 15-year option
Interest Payout Date: October 15

One good thing is that in both of these issues, the retail portion has been increased from 40% to 60%.

If the scenario which most people are talking about, interest rates falling, does come true then this could be the last opportunity (barring one more issue from IRFC) for investors to lock money at such interest rates. In the budget speech FM has confirmed that in next FY the infrastructure bonds would not be tax free bonds, so we may not see any such offering in days to come. Read about it here.

A query from a colleague who invests heavily in equities and is now contemplating building a debt portfolio also.
If he were to take a personal loan of 10 lakh INR to invest in these bonds, he would get INR 76400 per year. Total payout would be approximately 13.5 lakhs (interest + principal) and at end of 15 years one would get INR 21,46,000. Deducting the 3.5 interest payout one still ends up with a benefit of approximately 8 lakhs. Like us all, he is salaried and hence does not have own funds to invest and wants to borrow from bank and repay the loan at earliest from future salaries.
On face of it, it sounded like a fair idea to me and friends but am not sure if investing in bonds on borrowed money is good and if there is any other aspect of this which we are missing.

Thoughts on this?

Cheers,
S

[ashokrajagopal]

@sukhoi, I dont get how this plan is good at all for your friend.
If he just puts aside 50k per year on a PPF, he gets about 15L at the end of 15 years. Total payment made is 7.5L over 15 years. If he can somehow distribute the 13.5L that he is willing to pay the bank into 15 years, he will make much more as PPF final payout. Plus there is the ease of paying anytime in the year and no compulsion to pay fixed amount per year.

[AbhiJ]

Trying to cover all your queries. Note: I am no expert, just a investor. So Buyer Beware

Originally Posted by sukhoi

Hello AbhiJ,

Could you please advice on the taxation of the capital gains arising from these bonds.

Though the interest earned on these bonds is tax-free, any capital gain from sale in the secondary market is taxable. If you sell your Bond for a price that is more than the cost then you would have to consider this as a capital gain. Short-term capital gains from sale of tax-free bonds on exchanges are taxed at your income tax slab rate, while long-term capital gains are taxed at 10% without indexation. The indexation benefit is not available for Bonds/NCDs. (For STCG holding period is less than 12 months. For LTCG holding period should be more than 12 months)

Source: http://www.relakhs.com/new-tax-free-...-fy-2015-2016/

Originally Posted by sukhoi

If the scenario which most people are talking about, interest rates falling, does come true then this could be the last opportunity (barring one more issue from IRFC) for investors to lock money at such interest rates. In the budget speech FM has confirmed that in next FY the infrastructure bonds would not be tax free bonds, so we may not see any such offering in days to come.

You are overthinking, there are two many variables to make a decent judgement call.

I ll try to make it simple. If you are in the highest tax bracket - i.e. 10 Lac+ and don't want exposure in equity, put all your spare money in tax free bonds. A bond with a YTM of 7.59 % is as good as an FD with interest 11% (if you are in that tax bracket)

Originally Posted by sukhoi

A query from a colleague who invests heavily in equities and is now contemplating building a debt portfolio also.
On face of it, it sounded like a fair idea to me and friends but am not sure if investing in bonds on borrowed money is good and if there is any other aspect of this which we are missing.

Calculate the payout figures again. If they are what you say, its a safe bet.

That said, one must realize that tax free bonds, although one of the best debt investment, barely beat inflation when held to maturity.

[AbhiJ]

Originally Posted by sgiitk

Esp for older folk like yours truly. Even a ten year lock in in Tax Free Bonds may raise some questions about the maturity time. You may be will into your seventies by then.

Sir you must realize that Bonds are bought and sold everyday. The lock in is only for the interest rate, not the owner of the bond.

[sukhoi]

Originally Posted by ashokrajagopal

@sukhoi, I dont get how this plan is good at all for your friend. If he just puts aside 50k per year on a PPF, he gets about 15L at the end of 15 years. Total payment made is 7.5L over 15 years. If he can somehow distribute the 13.5L that he is willing to pay the bank into 15 years, he will make much more as PPF final payout. Plus there is the ease of paying anytime in the year and no compulsion to pay fixed amount per year.

Thanks for the inputs ashokrajagopal. Yes, I agree that PPF is the best amongst debt instruments owing to the compounding benefits. But in any given year he would be able to invest only 1.5L in PPF (max). What attracts him to TFB is the fact that he can park a lumpsum today, enjoy tax free returns and then from those returns (of say 76,400) invest in PPF. He is expecting funds being available in next 6 months to be able to pre-pay part loan amount if not entire amount. Not to mention the fact that the recent EPF scare has made him (and me) suspicious of PPF going down the same road in days to come maybe.

Originally Posted by AbhiJ

Trying to cover all your queries. Note: I am no expert, just a investor. So Buyer Beware

If you are in the highest tax bracket - i.e. 10 Lac+ and don't want exposure in equity, put all your spare money in tax free bonds. A bond with a YTM of 7.59 % is as good as an FD with interest 11% (if you are in that tax bracket)

Calculate the payout figures again. If they are what you say, its a safe bet.
That said, one must realize that tax free bonds, although one of the best debt investment, barely beat inflation when held to maturity

Thanks for the inputs AbhiJ. Yes, he falls in the 30% bracket and hence interested in these bonds. We double checked the figures and he is quite keen on this, especially since he is hopeful of closing the loan within one year and hence the interest payout (cost for getting lumpsum 10L ready as per him) would also be much lesser. The only catch, getting a personal loan sanctioned and disbursed within a day

Cheers,
S

[sdp1975]

How safe are TNPFC fixed deposits ? They are offering attractive interest rates ranging from 7.25% to 8%. It's owned the state govt.

https://www.tnpowerfinance.com/tnpfc-web

[vasudeva]

It seems that we have 2 options for non lockin options: terrible returns but safe, dont even beat inflation. Or be a monkey investing in equity and think all is well and all will be well. But anyway with that, do try to keep a mix of low volatile debt funds/FD, hybrids/balanced, and pure equity. And hope to get a blended 3-5 year CAGR of 9-10% pa. Also at my age of 55 years, I prefer to avoid lock in investments of more than 3-5 years. Do have some RBI bonds but that is it. Also EPF but that will come on retirement and is giving me a handsome 8% pa plus. So no issues if that continues till retirement.

[Ananthang]

Originally Posted by sdp1975

How safe are TNPFC fixed deposits ? They are offering attractive interest rates ranging from 7.25% to 8%. It's owned the state govt.

https://www.tnpowerfinance.com/tnpfc-web

My dad has been using it for last 10 years and we have seems people investing in lakhs easily. It has same guarantee as any other RBI governed bank.

I have memory starting from 12.5% RoI when we started.