What makes floating-rate govt bonds attractive

Mumbai: Savers in lower tax brackets are set to benefit from a new set of sovereign debt papers being offered from next month, with the central bank selling the floating-rate securities linked to National Savings Certificates for the first time to individuals and Hindu Undivided Families (HUFs).“These sets of bonds should be the most beneficial for individuals with less than 10 lakh in annual income,” said Deepak Panjwani, head – debt market – GEPL Capital. “Although HUFs are showing some interest, individuals with surplus money could well plan for their retirement with steady interest income flow.”These papers are being offered after the Reserve Bank of India (RBI) last month discontinued the offer of 7.75 per cent government bonds.People earning up to 10 lakh annually can earn 6.08-7.15 per cent after tax deductions, shows an estimate by GEPL. The tax-adjusted return ranges 5.36-6.08 per cent for people receiving 10-15 lakh a year. Above that income level, it is 4.79 per cent.76682027“The product offers better tax-free returns considering the existing secondary market rates,” said Vikram Dalal, founder, Synergee Capital. “A different set of individuals, who may have missed investing in earlier fixed-rate bonds, are likely to rush for the new series amid safety concerns.”Tax-free bonds are now trading at 4.5 per cent yield-to-maturity. So, the pre-tax yield will be 6.72 per cent for an investor falling in the top-tax bracket.“These bonds are a good option for a fixed deposit investor willing to lock money for seven years and earn more than a bank deposit,” said Vineet Nanda, managing director, Sift Capital.A bank deposit from the State Bank of India for a 5-10-year tenure earns 5.4 per cent, in comparison with 7.15 per cent pre-tax return offered by these bonds.“These floating-rate bonds have better chances of attracting subscriptions unlike the erstwhile inflation-linked bonds,” said Deepak Jasani, head — retail research, HDFC Securities. “The linkage with NSC as a benchmark is better than any consumer inflation gauge.”Bonds should find investor traction when concerns over safety and falling interest rates are paramount, he said.These bonds will be priced after adding 35 basis points over and above the National Savings Certificates, a government investment plan that now offers 6.80 per cent. Every six months, the interest rate will be reset depending on the NSC gauge and paid to investors.Earlier, inflation-linked bonds were not successful as consumer prices were kept under check, capping returns on those securities.Investors or HUFs can buy them from bank branches including SBI, ICICI Bank, HDFC Bank, IDBI Bank and brokerages with subscription opening on July 1.However, for a seven-year maturity with no premature exit option, concerns will linger over the future rate trajectory, with the government focused on driving down the cost of funds to foster investment.“Since the interest income will vary every six months, there is no certainty about the actual return that an investor can earn, which will be a deterrent,” said Rupesh Bhansali, head (distribution), GEPL Capital. Similarly, if there is a cumulative option, an investor knows what exactly he can get after seven years and could use the proceeds for set goals.

from Economic Times https://ift.tt/2CNekJf