Revisiting Tax-free Bonds: Ideal Instrument for Retired and Retiring Persons

I had written about Tax Free bonds a month back on my blog (read: https://humfauji.in/blog). There were many queries on the same. Hence, I felt the need to clarify some more on these tax-free bonds. In the meantime, the current crop of tax-free bonds on the block have improved in returns over the ones available earlier a month back, thus making them even better in their offering. The additional points that make these bonds attractive for the retiring and the retired persons are as follows:-

• The returns are even better now. Consider the table below for the Power Finance Corporation (PFC) bonds:

As can be seen, the returns given in the PFC bonds equal a fabulous pre-tax return of up to 12.91% per annum of that available from an equally safe instrument like bank FDs, PO MIS or SCSS.

• Due to the very long time-frames of 10, 15 and 20 years of these bonds, these good returns are assured for long periods of time, resulting in consistent and good cash flows. Thus, the interest rate risks are mitigated for these long periods.
• Another good aspect of the bonds is the lack of ‘Call’ option on these bonds by the issuer, thus removing the nasty surprise of the company deciding to call back the bonds any time in future. Such a surprise has affected large number of investors in the past in many other bond issues including in sovereign type of bond issues.
• These bonds are very good for portfolio diversification. With the high assured return on investments and near zero probability of credit default, these bonds are very good portfolio diversification tool for any investor.
• Some retired people have expressed a doubt how they can use the yearly interest for their monthly household expenses. It is rather simple. The yearly interest received can be comfortably invested in Liquid Mutual Funds which are currently giving approximately 8.2% per annum of safe returns. A Systematic Withdrawal Plan (SWP) can be set up for a monthly income on a given date every month. Eg, to get Rs 10,000 per month, take Rs 14 Lakhs worth of these bonds for 20 years. It will give you Rs 1.2 Lakhs per year, which can be used to get Rs 10,000 per month. In case you do not need the interest in a particular year or for initial few years, let the yearly interest lie in suitable debt mutual funds and start the SWP when you feel the need. You will get a higher corpus and would be able to afford higher monthly ‘income’.

These bonds are really a case of making hay while the sun shines in case you are the kind of investor who wants good but safe long-term returns.