Tax free bonds score over SIPs

Excerpts from India Business Hour on CNBC-TV18 Watch the full show »

Tax free bonds are the latest buzz in the investment space, offering, as they do, guaranteed and tax free returns. But the mutual fund industry is not impressed, report CNBC-TV18's Mitra Joshi and Shruti Rajkumar.

With market volatility and diminishing commissions making mutual funds less attractive, distributors are now looking at tax-free bonds as next best option. But as a result of this, mf products like systematic investment plans (SIPs) subscriptions have lost out considerably.

These bonds offer a lock-in period of 10 years and 15 years respectively and give guarantied, tax-free returns of 8.2% and 8.3% annually.

Tax free bonds have been launched by companies like national highway authority of India, Power Finance Corporation, Housing and Urban Development Corporation (HUDCO) and Indian Railway Finance Corporation.

Though retail participation is minimal, distributors are targeting corporate and hints that give them higher commissions.

Gajendra Kothari, MD and CEO, Etica Wealth Management says, "These are quasi-government, almost with a sovereign guarantee, no question on safety part, no issue on liquidity part as these are bonds are listed on the stock exchange so incase if you want to encash after two to three years, you can easily do so."

In comparison,  SIPs which have issued negative returns over the last few yrs, are witnessing dwindling renewals and switchover to other asset classes.

The net addition in sips have slowed down in the last five months, on an average every month if 2 lakh SIPs folios are added, over 1 lakh sips folios are foreclosed.

Deepak Khemani, Independent Financial Advisor says, "A lot of SIPs have been closed in the last few months. Correspondingly, there are not enough SIPs going in equity mutual funds."

Looks like tax free bonds are here to stay...with the government finding it difficult to raise money from volatile equity markets. Tax free bonds on the other hand could help the government raise and deploy money in infra schemes and other government projects.

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