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HUDCO bonds even better in second tranche

HUDCO bonds even better in second tranche

The quasi government company is offering even higher interest rates on its tax-free bonds in the second tranche. If you're looking for long-term capital appreciation, look no further.

With interest rates on the rise, all the tax-free bonds issued this year have been good buys for investors in the upper tax brackets. When Housing and Urban Development Corp Ltd (HUDCO) issued the first tranche of its tax-free bonds in September 2013, we said it was a ‘great opportunity’, as it gave a coupon rate of 8.39% for the 10-year bond, 8.76% for the 15-year bond and 8.74% for the 20-year bond. With the second tranche, they’ve topped themselves.

Issue details
For retail investors applying for bonds up to Rs10 lakh, the coupon rate is 8.76% per annum for 10 years, 8.83% for 15 years and 9.01% for 20 years.

The issue opens on December 2, 2013 and is scheduled to close on January 10, 2014. It could also close earlier, so don’t postpone taking a decision. The bonds are proposed to be listed on the BSE. Interest will be paid annually.

Should you buy?
If you have a long-term view, most definitely. If liquidity is a priority, perhaps this isn’t the best investment. This is because exiting early would strip the investment of its tax benefits and if trading volumes are low, you may be selling at a discount. Also, while those in the bottom-most tax bracket may not find it attractive, it gives better post-tax returns to those in the upper brackets. If you lock your money into an FD offering 9% today, you’ll end up receiving a return of just 6.3% after tax is deducted on the interest. With tax-free bonds, on the other hand, your returns would be almost 12.5%.

HUDCO has received a rating of AA+ from CARE and India Rating and Research, indicating high safety with respect to timely servicing of financial obligations. The reason for this – if you thought even all quasi government owned were entitled to AAA ratings – is that the corporation has some commercial dealings as well. Typically, there is low risk in investing in any entity that is owned by the government, so there should be no difference here. Perhaps, though, the lower rating has also led to the higher interest rate.

How to buy
You can find the form on the HUDCO website or on the websites of the issue managers, Axis Capital Limited, Edelweiss Financial Services Limited, HDFC Bank Limited and Karvy Investor Services Limited.

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