Limited Period Offer:Be a PRO for 1 month @Rs49/-Multiple payment options available. Know More

Should you invest in PFC tax-free bonds?

Jitendra Solanki of JS Financial Advisors analyses whether one should invest in the tax free bonds rolled out by the Power Finance Corporation.

October 14, 2013 / 07:14 PM IST
 
 
live
  • bselive
  • nselive
Volume
Todays L/H
More

Jitendra Solanki 
JS Financial Advisors

After HUDCO and REC, Power Finance Corporation has now come out with its tax free bonds. The bonds have been seeing a lot of attraction due to the high rate of interest which is offered in the current economic environment. But one should not invest only for interest rates and analyze it according to the requirement to decide it’s inclusion in the investment portfolio.

Here is a brief review of the product and who should consider it for investing:

PFC Bond Issue

The company is a PSU from the power sector and its objective is to provide financial resources and encourage investments.  This is a highly rated company i.e. AAA by ICRA and CRISIL which indicates that it is stable. The company has been allotted Rs 5000 crore for raising funds through tax free bonds.

Some of it has already been raised through private placement and approx. Rs 3875 crore is being raised through this issue. From it 40% is reserved for retail investors.

Features

These bond carry a term of 10, 15 & 20 years which an investor can choose to invest based on one’s requirement. The minimum investment amount is Rs 5000 i.e. one has to buy minimum 5 bonds of Rs 1000 each.

The retail investors can invest up to Rs 10 lakh in this issue and any investment above this threshold limit is categorized as HNI.

Who Can Invest?

PFC bonds are available to even NRIs on repatriation and non-repatriation basis, Corporates and Qualified Institutional Buyers (QIB) apart from Resident Indians. 40 percent of the issue size is available to retail investors’ category which is below Rs 10 lakh investment while the rest is for other category of investors.

Lock-in

Although, the bonds carry a very long tenure, there is no lockin perse. This is because these bonds will be listed on BSE and so will be traded. If an investor wants to exit from the bond before the term, he/she can do it through the stock exchange.

Interest Rates

This is the most important aspect of these bonds. The interest rate offered to investors is higher than the recent previous issues of REC, HUDCO and IIFCL. Retail investors, below Rs 10 lakh investments, are being given preference through higher rates than other category of investors.

Following are the interest rates for different terms in the issue-

10 year15 year20 year
RetailOthersRetailOthersRetailOthers
8.43%8.18%8.79%8.54%8.92%8.67%


 

 

As can be seen the highest rate offered is 8.92% for retail investors for a 20 year horizon. This is higher than even IIFCL which offered 8.75% for the same period.

Should You Invest

The interest rates is surely a major attraction in this issue. A tax free interest rate 0f 8-8.92% will translate into pre-tax yield of 12-12.75% for any individual in the highest tax slab i.e. 30%.

While for individuals in 20% and 10% tax slab the pre-tax comparative yield will be the range of 10.5% -11% and 9-10% respectively.

These yields are higher than one can receive in the similar rated instruments which make PFC bonds an attractive option.  The reason can be the spike in the G-Sec yield in the recent times leading to PFC offering higher rates.

The other attraction is that there is no lock-in in these bonds unlike infrastructure bonds and so a higher liquidity is offered to investors.

With higher coupon to retail investors, even the buying/selling of bonds through stock exchange between retail investors will yield the same interest. Lastly, one can hold them in physical or demat as one likes to.

The bonds offer a good option for retirees who seek regular income and small investors looking for fixed income investments. However, there will be some issues associated with any investments you make.

Here, the bond is issued by a company in power sector which has been lagging now on reforms. This has led to companies like PFC or PTC  facing issues on their cash flow.

But since the country cannot do without power generation the issue may be addressed in coming years and being a PSU the safety offered to investors is higher. The other important aspect to consider is the inflation, especially for retirees, who will invest for long term income requirement.

With yield at current levels and considering the future movement, this may be the last issue offering such a high interest rate and so it forms a good option for investing part of your money. But have your goals and other investments aligned to decide the share of these bonds in your investment portfolio.

The author is a Investment Adviser & CFP at JS Financial Advisors.

stay updated

Get Daily News on your Browser
Sections