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Invest in tax-free bonds for capital appreciation
November, 28th 2013

Many savvy investors have started investing in tax-free bonds since September to earn tax-free interest income as well as make a capital appreciation on these bonds, as the interest rates go down in the next few months. Financial advisors are also recommending these risk-free bonds with tax-efficient returns to their clients as they believe investors have a good chance of pocketing capital gains in the next 15-18 months. "Interest rates could fall 50-75 basis points (100 basis points = 1%) over the next 12-15 months.

In such a scenario, bond prices will move up, giving you a capital appreciation," says Deepak Punjwani, head (Debt Markets), GEPL Capital. Longer the tenure of the bond, the higher could be the capital appreciation. Punjwani says if interest rates were to fall 1%, investors can hope for a capital appreciation of 5-6% on a 10-year bond, while they can pocket a gain of 9-10% for a 20-year bond.

However, investment advisors caution investors against taking a hasty decision, as predicting the future course of interest rates with certainty is a tricky business. If rates shoot up for some unforeseen reason, bond prices could fall and investors would be staring at capital losses. That is why many experts are asking investors to buy these bonds only if they can afford to wait till at least 2-3 years. "With growth rate touching a low of 4.4%, it is a matter of time before RBI focuses on growth again.

With the kharif crop likely to come in and rabi sowing likely to start soon, food inflation could cool off from here. We expect interest rates to fall 50-75 basis points over the next 12-15 months," says Ashish Shanker, head (investment advisory), Motilal Oswal Wealth Managers. Many money market analysts hold a similar view. If you are convinced, you can take a close look at these bonds.

According to bond distributors, three public issues of tax-free bond issuances from IRFC, NTPC and NHB are likely to hit primary markets to raise as much as Rs 13,850 crore in December. The NTPC issue opens December 3 and will offer taxfree interest of 8.66% for 10 years, 8.73% for 15 years and 8.92% for 20 years, respectively. 28/11/2013 Invest intax-free bonds for capital appreciation.

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