Tuesday, December 8, 2015

DONT INVEST BLINDLY IN TAX FREE BONDS

As expected, there is a mad scramble to invest in IRFC's Tax Free Bonds which opened today.
People are rushing in to invest as if there is no other alternative to this issue.

IRFC tax free bond bidding status:

Bidding @ 11.04 am

CAT I        0050.000
CAT II       0708.679
CAT III      0810.370
CAT IV      0659.285

TOTAL      2228.333

Figs in crores

Already more than 2000 crores in 1 hour flat!!


AT 1 PM:
 
IRFC tax free bond bidding update

Bidding @ 01.15 pm

I      0305.000  44.87%
II     1044.939 115.28%
III    1283.805 113.31%
IV    1325.228  73.10%

TOT 3958.972   87.36%

Figs in crore

And 4000 crores in 3 hours!!







Is it so good?
Are you missing something by not investing?
Lets analyse....

IRFC will be giving you max of 7.53% TAX FREE return (15 year )...meaning, the interest earned on this investment will NOT BE TAXED.

But, do not get confused, the Investment itself will NOT qualify for deduction u/s Sec80C!!!

Just today morning, I was telling a client whose Portfolio was equity heavy and there was definite space for Debt exposure and he was hell bent on investing in this Tax free Bonds.
I suggested him to rather look at Debt Funds at this stage and maybe Arbitrage Funds too.

The BIGGEST ARGUMENT IN FAVOUR OF DEBT FUNDS is that Indexation benefit is allowed but is not allowed in these Tax Free Bonds if you sell before the tenure closes.
That means, the long-term capital gains is taxed at 10%.


Now, when you are investing in a instrument for 15 years, I wonder why should anyone be happy with the paltry return of 7.53% when he can easily earn much more than that in Equity.
Yes, equity is volatile but we all that TIME IN MORE IMPORTANT IN MARKETS and over a period of time, the returns will compensate for the volatility.

If your goal is only to PRESERVE WEALTH, then sure, go ahead, invest in these Tax Free Bonds, but if you want to CREATE WEALTH, then you have to look hard and think seriously about diverting this money into EQUITY MUTUAL FUNDS.

INDIA IS A GROWING ECONOMY :
There is absolutely no doubt that India is in a stage where it is poised to take off in a big way....and this is a given and as & when this happens, the Inflation will definitely bounce back and your returns from the Tax Free Bonds will not even match the Inflation and thus your Real Return could well be NEGATIVE.


PLEASE UNDERSTAND :
Wherever there is GUARANTEE , you need to understand you are sacrificing wealth creation.

Never forget the monster called INFLATION................

AND FINALLY, 
The MOST important point for me is that TAX TREATMENT ALONE should never be the ONLY criteria for any investment and if someone is investing in Tax Free Bonds with only Tax Benefit as backdrop, he is making a huge huge mistake.

Investments should always be Goal Based

And, please contact your Financial Advisor before investing as he will be in the Best Position to guide you based on your Asset Allocation and Risk Profile.




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