The tax-free bond issue of Rural Electrification Corporation got oversubscribed four times its issue size this week.
The top-rated issue, however, offered yields at 7.43 per cent for 20-year maturity and 7.14 per cent and 7.34 per cent for 10-year and 15-year maturities, respectively, to retail investors.
The rates were higher than similar-maturity secondary market yields but less than what Power Finance Corporation had offered a few weeks ago.
The country's largest lender the State Bank of India offers 7.5 per cent fixed deposit rate with two-three year maturities. For investors who are in the middle tax bracket, the post-tax return works out to 5.96 per cent, while for those in the highest tax bracket the return works out to be 5.18 per cent.
Compared with this, the REC tax-free bond offered a maximum of 7.43 per cent in the 20 year category, a clear 225 basis points higher than SBI’s fixed deposit rate. REC raised around Rs 2,800 crore from the issue.
Tax-free bond prices are linked to the benchmark bond yields, which move following RBI rate actions. Out of total investors more than 47 per cent were retail, who showed a preference for the longer maturity bonds.
Tax-free bonds are the best possible investment option for investors in the 20 per cent and 30 per cent tax brackets compared with bank fixed deposits.
With interest rates moving down there is rush for tax-free bonds among retail and HNI investors.
The next issue is expected to be from NHAI for Rs 12,000 crore, where retail investors can expect atleast a 50 per cent allotment compared with a 22 per cent allotment in REC bonds.