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Experts advise that debt investors may consider tax-free bond issues of NHAI, IRFC and debenture issue of ECL Finance as interest rate cut looks a distinct possibility now
Distributors are recommending the ongoing taxfreebondissuesof National Highway Authority of India (NHAI) and Indian Railway Finance Corporation (IRFC) and non-convertible debenture of ECL Finance (ECL) in a big way, arguing that this is probably the last chance for debt investors to pocket such attractive returns.
They claim that the lower-thanexpected wholesale price index (WPI) is a clear indication that interest rates arelikely tostarttheir downward journey soon. The WPI, a measure of inflation, for December was recorded at 6.16%, at five months low. “If the inflation remains low, interest rates are likely to go down gradually hereon. People in need of regular income should consider investing in bonds at the current attractive rate of returns,” says Abhishek Gupta, CEO, Moat Wealth Advisors.
The AAA-rated NHAI tax-free bond offering 8.52% and 8.75% for 10 and 15 years, respectively, is an attractive investment option for debtinvestors,say market participants. Institutional investors have already endorsed the NHAI bonds by lapping up the issue on the first day itself. Though the institutional investors’ quota is fully subscribed,the retailinvestors’ quota may remain open for subscription for at least a couple of days more, say experts.
One may expect a gradual downward movement in longterm interest rates and one may not get the ongoing attractive yields in future. If you are in the income-tax bracket of 20% and more, invest in these tax-free bonds.
NCDs of ECL Finance (ECL) offer 11.6% and 11.85% for 36 months and 60 months, respectively. Investors from low income-tax brackets, comfortable with AA-rated instruments, can consider investing in ECL’s NCD. Many investment experts believe that the Reserve Bank of India (RBI) may maintain the status quo in key interest rates in its monetary policy review scheduled on January 28. Benign WPI numbers in December and the likely low inflation in January and February due to high base effect can offer some headroom to the RBI to cut interest rates in future, they argue.
Faltering growth is another reason why the central bank may look at easing rates: Index of Industrial Production (IIP), a measure of economic growth, for November is in red and is measured at a negative 2.1%. The RBI may change the tone from hawkish to dovish in the upcoming monetary policy review andonecan see a cut in interest rates by April.
Most market participants believe that the tax-free bonds can also be looked at by high net worth investors to play the interest rate cycle. “Interest rates are expected to go down. And in such circumstances, investors in tax-free bonds enjoy twin benefits — they get to lock in the money at current attractive rates for long term and they may see a capital appreciation, if interest rates fall. If you are looking at playing the interest rate cycle theme to earn some capital gain, stick to tax-free bonds, say experts. These tax-free bonds score above the NCD on liquidity parameter.
The size of tax-free bond issues is big in absolute terms. Compared to . 500-crore issue size of ECL Finance, IRFC and NHAI are expected to be more liquid in the secondary market, given the issue size of . 8,663 crore and . 3,698 crore, respectively. Also, the ‘AAA’ rating associated with tax-free bonds should ensure that investor appetite for these bonds in the secondary market.
Though the tax-free bonds score over NCDs for investors from the 20% and more income-tax bracket, investors from the lower income tax bracket, keen to buy and hold their investments, may consider investing in ECL’s NCD.
Buy some shares, say five, of Edelweiss and then invest in the NCD, as it makes shareholders eligible for a 25-bps higher interest,
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