Portfolio

IRFC bonds: Give this one a miss

Meera Siva | Updated on January 07, 2014 Published on January 07, 2014

The interest rates on the bonds are lower than those offered by competing issues still open for subscription.

Could not catch the NHB tax-free bond issue? There is another tax-free bond issue, opening tomorrow (January 6), from the Indian Railway Finance Corporation (IRFC) . IRFC, the fund raising arm of the Indian Railways, plans to raise Rs 1,500 crore through this AAA-rated issue. Including the option to retain excess subscription, the total bond offer size is Rs 8,663 crore, 5.77 times the base issue size. IRFC plans to use the money to buy locomotives, wagons and coaches and a small share will go towards financing projects.

Better options around

The interest rates offered by IRFC to retail investors (those who invest up to Rs 10 lakh) are 8.48 and 8.65 per cent for 10-year and 15-year periods respectively. But these rates don’t look attractive enough. They are lower than those offered by IIFCL, whose tax-free bond issue came up in December and is still open for subscription. IIFCL offers 8.66 per cent and 8.73 per cent rates for 10 and 15 years. IIFCL also offers a 20-year option with a rate of 8.91 per cent. Investors can opt for this over IRFC.

IIFCL is among the top financiers of infrastructure projects in the country. Its offer to raise Rs 1,000 crore, with an option to retain up to three times the base issue size has been open for over three weeks. As of Friday (January 3), the issue was subscribed 2.8 times. Hence there is a chance that the offer may close before the scheduled closing date of January 10; so you may want to act quickly.

Tax-free bonds handsomely beat taxable options such as bank deposits. Currently, 10-year fixed deposits offer an interest of 9 per cent annually. After paying the taxman’s dues, the return diminishes to 8.35, 7.39 and 6.43 per cent for those in the 10, 20 and 30 per cent tax brackets respectively.

Returns near peak

In case you miss this issue, there may still be other high credit rated offers coming up.

For instance, an issue from National Highway Authority of India (NHAI) to raise Rs 3,700 crore is expected to open this month. But it is difficult to predict the interest rates which may be offered on the new issues, as they are linked to the yields on Government securities. It is not easy to time rate cycles or to predict the peak.

There was no interest rate hike by RBI in December and concerns over slow economic growth may keep rates unchanged, so the rates may not increase substantially. So, we may not be too far from the peak rates currently.

Before you buy your tax-free bonds, keep aside funds for investing in Public Provident Fund (PPF) which is a first-class investment option. Your investment in PPF compounds at a tax free rate of 8.7 per cent currently, and you also get tax deduction on investment up to Rs 1 lakh a year - setting you on the right track towards building a good tax-free corpus.

> meera.siva@thehindu.co.in

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