Low rates of the Federal Bank? Invest in quoted bonds
NEW DELHI: Banks continue to reduce fixed deposit rates (FD), putting pressure on those who survive with interest income. For example, SBI has reduced DF rates to 6.6% for the elderly and 6.1% for others as of January 10. Large private banks do not offer much more. The highest interest rate offered is only 6.9% for the elderly and 6.4% for others.
Although FD rates are low, the yields of quoted bonds of quality companies are at higher levels, which provides an opportunity for smart investors. Unlike DF, the purchase of bonds can be complicated. Therefore, investors can filter their needs based on the following factors.
The first factor to consider is your ability to take risks. This is because several company bonds such as, etc., are now quoted at very high yields. However, do not hurry to buy. Investors should understand that high returns are due to the risk involved, says Anil Rego, founder and CEO of Right Horizons.
Retail investors, especially those who wish to move from federal banks, should avoid poor quality papers. The bonds of several high quality companies are now quoted at a yield of 8.5% or more. Retail investors should consider investing in quoted bonds subject to AAA-rated taxes now because the yield gap between safe-bank FDs and AAA-rated bonds is almost 2%, says Deepak Jasani, Director of.
Tax ation and tax slabs should be considered next. Listed tax-free bonds are good options for people in the high tax brackets. The yields on tax-free bonds are now in the range of 5.6-5.9%. “Since the pre-tax yields on tax-free bonds are now at around 8.5% for people in the 30% tax slab, it is the best option for HNIs,” says Rego. Since these bond issuers are highly rated public sector undertakings, the risk is also very low.
Most banks allow immediate withdrawal of FDs, but cannot do the same with quoted bonds. To liquidate your investments, you must sell them in the market and the money will be credited to your account only after a few days (payday). Another issue is that all these bonds listed are not traded frequently. “When investing in quoted bonds, investors should be careful with liquidity. You may have problems if you buy bonds with low liquidity and want to sell them before maturity, ”says Rego. Spreading purchases and sales is another option.
Consider bond ETFs too
Buying in fixed-term bond funds listed is another option. Since the 20% long-term tax here applies after indexing, the tax obligation will be low. For example, suppose that one of these ETFs generates a return of 7% during a tenure period of 3 years and inflation over time is 4%. Since the 20% tax is applicable only to inflation-adjusted returns, 3% in this case, the after-tax return will be 6.4%.
Although there is sufficient liquidity in the recently presented Edelweiss Bharat Bond ETF counter, experts are concerned that the scheme is not yet fully reversed. However, the fund house says that this problem has been resolved.
The main advantage of these listed ETFs is that you can time the market based on your current returns. The risk of default is not applicable for these ETFs because all these schemes are based on government securities or with PSUs with AAA rating.