JS Financial Advisors
It’s season of tax free bonds now. Much like earlier years, investors see rush of such bonds in the last half of financial year. This year too there has already been quite a few in numbers and more are in line. The latest company to issue tax free bond is NHPC.
For investors, this may be the welcome opportunity when confidence on investing in equity markets is low and there are hardly fixed income avenues with real fixed income. So how this issue favors for investing.
Let’s review briefly to analyze what the company is offering:
NHPC is also a government controlled entity which operates in hydroelectric power generation segment. It is an AAA rated company which means the safety is high. The company is raising funds up to Rs 1000 crore by issuing tax free bonds of long tenure.
What’s on offer?
The bonds from this company are available at price of Rs 1000 each and any investors who wants to invest has to subscribe for min 5 bonds i.e. Rs 5000 investment is required. The issue opened on 18th October and will close on November 11th. 40 percent of the total issue size is reserved for retail investors ( below Rs 10 lakh investment).
The allotment is on first come first serve basis and the company can close the issue before period, if needed. These bonds will be listed on BSE and NSE providing a higher liquidity than PFC to investors.
NHPC is offering the same interest rate as PFC. So retail investors (those who invest up to Rs 10 lakh) will get 8.43 per cent interest annually on the 10-year bonds, 8.79 per cent on 15-year and 8.92 per cent on the 20-year instruments.
Like PFC, the yield is fairly attractive as it is the highest interest rates offered uptil now and one may not see such rates later this financial year. Also, when compared, bank fixed deposit will fetch lower returns due to taxability of the interest.
Should you Invest
The issue is already oversubscribed by 2 times so the interest from investors quite high. The chances of NHPC issue getting oversubscribed more in coming days are higher. But when you compared NHPC with PFC, both being government entities and AAA status, the later has an edge.
If we look at financials, then PFC has been more consistent in generating profits and its return to equity is considered to be better than NHPC. Also issue size of PFC is much larger than this company.
With all these credentials PFC becomes the first choice for investing. However, considering NHPC is also a government controlled company with AAA rating, the issue is worth investing if PFC has been missed out.
But one should take caution and should not rush to lock in money in all these bonds. The exposure should be in line with one’s requirement and there are still avenues like PPF which yield better than these tax free bonds of same tenure.
If you are looking only for investment then PPF should be the first choice for fixed income allocation. Wiser to do your analysis and then decide the share of these bonds in your investment portfolio.