NHAI Tax Free Bonds and PFC Tax Free Bonds can deliver high Capital Gains when Interest Rates Fall

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   The . 10,000-crore National Highways Authority of India, or NHAI, bond offering, which opens for subscription on December 28, offers a good opportunity to investors to lock in funds at higher yields and earn tax-free interest income, according to wealth managers.

Apart from coupon rates in excess of 8%, NHAI bonds will start delivering high capital gains once interest rates start moving downwards.

Forty per cent of the . 10,000-crore issue is earmarked for institutional investors, 30% for retail investors and high net worth individuals. The bonds will have differential coupon rates of 8.2% for 10 years and 8.3% for 15 years, merchant bankers say.

The NHAI issue presents a good opportunity for investors to lock money in triple-A-rated sovereign-like bonds at higher yields. Apart from high coupon rates and safety, these bonds will be very liquid because of the large float. Investors will easily be able to buy and sell these bonds on the exchange.

   These should be a part of the core fixed income portfolio.

National Highways Authority of India will use the issue proceeds to part fund land acquisition, meeting viability gap funding and annuity payments among others.
According to wealth managers, tax-free bonds — even if it bears a lower pay-out rate than G-Secs and corporate bonds — are good bets for investors in the current scenario as not many asset classes are generating near-8% risk adjusted (tax-free) returns. Despite 10-year G-secs and bank fixed deposits yielding 8.3% and 9.25%, respectively, wealth managers expect the bond to attract investments because of its tax-free status.

An 8% tax-free coupon rate is very much comparable to an investment product that delivers 12% pre-tax returns. This issuance is even better than bank fixed deposits, which are currently giving about 9% (pre-tax) returns.

Also, with interest rates expected to slide over the next few months, money managers are hoping to generate higher returns by selling these bonds at a relatively higher coupon rate. In the event of a fall in interest rates, wealth managers expect 5-10% price appreciation on premature encashment of the bond.

 

How to apply ?

You can download the forms below

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