The recent Franklin Templeton fund closure has left a large number of mutual fund investors worried about the safety of their investments. Investors – particularly those holding debt funds – have started evaluating their funds that are perceived to be risky and are now looking at other investment options also.
Adhil Shetty, CEO, BankBazaar, says, “Mutual fund is a big and sturdy industry that all retail investors have come to depend over the last 10 years, but it is clear that some debt funds today are either locked down or losing value. Hence, for people holding debt funds, this might be the time to evaluate their funds and move that money to other high-yielding options.”
RBI bonds and tax-free bonds are one of such alternate investment options that are being looked upon by investors for parking their money.
RBI bonds come with a lock-in period of 7 years while offering 7.75 per cent return without any tax-saving option for the investor.
Abhishek A Rastogi, Partner, Khaitan & Co, says, “Even though these bonds offer a higher rate of interest to the investor for any amount invested, investors should keep in mind that these bonds are taxed. They are not tax-free bonds and come with a longer tenure of 7 years. Hence, they are not suggested for investors for whom the priority is liquidity. Additionally, the effective rate of interest, post-tax returns, is quite less.”
In comparison, experts say, bank FDs offer better returns. For instance, the HDFC fixed deposit offers an interest rate of 5.8 per cent for the tenure of 1 year, which is a better option if an investor is planning to park his/her money keeping liquidity in mind.
Having said that, Rastogi adds, “RBI bonds should be looked at by mid-income group people who plan to park some of their money in the bank fixed deposits for longer tenures. For instance, people in the 30’s and 40’s who are looking to put around 10 per cent of their money in fixed deposits, can alternatively look at RBI bonds.”
The 5-year HDFC fixed deposit offers an interest rate of 6 per cent to depositors. Hence, people who are planning to put their money in similar bank fixed deposits for a tenure of 5 years can alternatively look at the RBI bond options for a tenure of 7 years, which are safer, at the same time earning a higher interest rate.
Tax-free bonds, on the other hand, even though they offer lower returns of 5.12-5.15 per cent (indicative yields), are tax-free. These bonds generally have a long-term maturity of ten years or more. Hence, investors can choose from the various maturity options available. Public sector undertakings such as HUDCO, NHAI, REC, NTPC, IRFC, IREDA, PFC, and NHPC offer such bonds. Archit Gupta, Founder, and CEO, ClearTax says “Tax-free bonds favour long-term investors who make large investments and pay taxes in the highest income brackets, especially who are taxable in the income bracket of 30 per cent (plus a cess of 4 per cent). The return on the bonds is risk-free compared to equity investments which fluctuate due to volatility. Thus, the returns are stable in the long-term and the original investment remains intact too.” Even though these bonds typically come with longer tenures, they can be liquidated at any time as they are tradable on exchange before maturity in the secondary market, proving to be ideal for an investor who has liquidity in mind.
With tax-free bonds, the investors earn tax-free interest of 5.5 per cent annually. The maturity proceeds on the bonds are also exempt from tax. On the other hand, if such taxpayer invests in a fixed deposit at 6 per cent (current interest rate) for 10 years, the after-tax return will be 4.13 per cent. Thus, the return on tax-free bonds is higher than the present fixed deposit rate.
Rastogi says, “The government should proactively start introducing the tax-free bonds, which will bring relief to all stakeholders.”
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