August 4, 2022
  • August 4, 2022

Tax-Free Bonds vs. Bank FDs: Which is Right for You?

By on June 25, 2022 0

Tax-exempt bonds vs bank FDs: Against the backdrop of a hawkish interest rate regime and high volatility in stock markets, tax and investment experts argue for short-term debt and cash. In fact, in a rising interest rate regime, equity returns should remain low as volatility is expected to continue in the near term. Thus, Indian household savings are expected to shift to safe havens like FD bank, gold, small savings schemes, etc. -savings bonds and maturity plans may be a better option than bank FDs. They said bank FDs won’t yield more than 5% in the short term, while tax-saving bonds could earn 1.5% to 2% more than bank fixed deposit rates offered for any market. what duration.

Speaking on tax-exempt bonds versus bank fixed deposits, Vikram Dalal, managing director of Synergee Capital Services, said, “For high net worth individuals, I will suggest tax-exempt bonds and maturity plans. target (Bharat Bond ETF, etc.) getting returns of 5.5% to 5.55% in the Bharat Bond ETF will give 7.25% In the rising interest rate scenario, mutual funds long-term debt like PSU and bank funds, income funds or Gilt funds will give sub-optimal returns.” He said that in a hawkish regime, investors are looking for safety, a reasonable return on inflation and liquidity Central PSU bonds, GOI/SDL securities and AAA rated private sector bonds are the preferred investment options.

On why the tax-exempt bond is a better option in a rising interest rate regime, Jugal Mantri – Executive Director and CEO of Anand Rathi Global Finance said: “Investors are opting for an instrument of debt based on three basic criteria – security of capital, liquidity and consistency of return AAA-rated public sector bonds offer the greatest security, being rated – offer entry/exit opportunities at any moment and offer higher interest rates compared to other opportunities like bank FDs.As we know, RBI is targeting long-term inflation of 4% (+/-2 percent), the recent surge in Bond yields offer a great opportunity to generate a real return on debt securities (net of inflation).”

“The cyclical evolution of long-term interest rates and current hawkish expectations have already pushed interest rates up about 150 to 200 basis points from their lows of the past two years. In turn , yields on AAA-rated 10-year bonds jumped to 7.75-7.90% and become attractive,” added Jugal Mantri of Anand Rathi Global Finance.

Differentiating between the after-tax yield on bank FDs and public sector bonds, Jugal Mantri said, “The after-tax yield on PSU bonds is significantly better than that on bank FDs. at 3.8% after-tax return on the SBI FD. Additionally, if you invest in debt funds, your effective tax rates on long-term holdings will decrease further and help you achieve a better net tax return. Earnings from some small tax-exempt savings plans may offer a better return, but there are limits to investing in such a program.”

At the right time to buy tax-exempt bonds, Munish Randev, Founder and CEO of Matterhorn Family Office and Advisors, said: “Taxpayers who fall into a high income tax bracket are generally looking to purchase tax-exempt bonds, usually at the peak of the interest rate cycle, that they can enjoy higher yields for a longer period, almost always held to maturity. A tax envelope and creating a market-linked debenture is another option to reduce the effect of taxation. For retail investors in the 10% or so tax bracket, they can take advantage of the higher yield. high of PSU bonds.But they would need a Demat account for that and the bonds must also be available in smaller lots.

On the tax-exempt bonds that you can think of adding to your portfolio, the experts have listed the following 10 plans:

1]IIFCL Tax Exempt Bonds 2028;

2]NHAI 2030 Tax-Exempt Bonds;

3]NHAI 2031 Tax Exempt Bonds;

4]IRFC 2031 tax-exempt bonds;

5]HUDCO 2031 Tax-Exempt Bonds;

6]PFC 2033 Tax Exempt Bonds;

7]NTPC 2033 Tax Exempt Bonds;

8]GDI 2032;

9]Tata Capital Financial Services Ltd 2032; and

10]HDFC Ltd 2028 (secure).

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