Attractive tax-free bond issues offered by the government have been coming up. The recently concluded tax-free bond issues from the NHAI and PFC received a good response from high net worth individuals (HNIs) and institutional investors.
The two which are running right now in the primary market are Indian Railway Finance Corporation (IRFC) and Housing and Urban Development Corporation (HUDCO). Though the closing date for the Hudco issue is February6 and for the IRFC issue is February 10, investors are advised to submit their applications at the earliest.
Rajeev Bajaj, the vice chairman and managing director of Bajaj Capital tells CNBC-TV18 that retail investors have responded well to these public issues of secured, tax-free bonds.
If there is a CRR cut in the next credit policy meeting, the yield could come down even further. "These bond offerings are done at very attractive yields," says Bajaj.
The payout in these bonds is attractive for investors in higher tax brackets. The low credit risk profile of these companies makes them great tax-free bond options.
Below is an edited transcript. Watch the accompanying video for more.
Q: Anything much to chose between the two issues HUDCO and IRFC?
A: Well, it's a question of choosing both for retail investors as well as HNIs given that people in the previous bonds of NHAI and PFC haven't got full allotments. It reminds you of the IPO days where you put in applications in names of all family members to try and get more allotment. Here as well it's a question of using all the names that are available in the family and applying in both issues because there is little to choose in terms of quality of offerings.
Both are offering similar interest rates between 8.2-8.3% range. The tenures are the same - 10 and 15 years. The pre-tax yields are very attractive in both - 11.75-12%. So it's a once in a lifetime offer for investors and people who are long-term investors and would like to arbitrage inflation with a long-term outlook these are the offerings to look at.
Q: Retail interest is back in this space because we heard some disparate reports on how retail was approaching some of these tax saving instruments?
A: Look at the size of these offerings. They are huge. You are talking about raising a few thousand crore and back to back offerings are coming up. Given that retail investors have responded beautifully and you compare that with flows of money coming into equity markets both direct and through mutual fund route which is almost a trickle, it's like droplets of money are coming into those markets. Let's look at things relatively. These bonds have attracted a lot of response from retail investors. Let's get into the mind and psyche of an individual investor today, especially retail; they are introspecting on the past four-five year experience and most of them have realized that they are over allocated to equity.
They went up to 70-80% of the portfolio in the equity and they are realizing now that even in a country like India where you get double-digit returns on debt instruments, it's not wise to put more than 30-40% of your portfolio in equity. So, a few crore investors at this point of time are actively rebalancing their portfolio by putting their money in bank deposits, company FDs and offerings like this. So when you get such attractive yields you need to look at coming into it and we are getting increased retail participation in such offerings.
Q: I was speaking to REC last week who said that they are coming out with a similar instrument of about Rs 2,000 crore by end February-March. For people who have missed out on these offerings what else is there in the pipeline?
A: You could look at these institutions themselves coming back for more. So there is more on offer, but will we get the same interest rates? With the RBI cutting CRR there is an indication that the yields would start coming down going forward. So people need to reflect and think whether they will get the same returns in the future offerings, maybe a little lower. Hence don't wait and come in now would be our advice.
Q: What is the basis of allotment for HNIs in these issues from the past couple of ones which were very oversubscribed?
A: It's been first come first serve. For HNIs if you come in on the first day you will get a preference over somebody who comes in later. Having said that, issues have been getting oversubscribed and the basis of allotment has been proportionate.
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