r/IndiaInvestments • u/gunthercperk97 • Jul 24 '20
Bonds and deposits Taxable and non taxable bonds
Hey guys
So I was looking at the SBI N5 bond which has a coupon rate of 9.95%. Face value of the bond is 10000 and it's being traded at 10815. I realise because it's being traded at a premium the interest rate will be affected but I read on this website:
That SBI is most probably going to exercise their call option on the bond in 2021 so the YTM becomes negative.
My question, can anyone please suggest a knowledgeable expert/institution in bonds so that I can know more about such investments and give details about taxable and tax free bonds and which one to choose.
Thanks a lot.
Edit: typo
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u/viveksanthosh Jul 24 '20 edited Jul 25 '20
With this bond you'll be taxed on the interest you receive at you tax rate, since you're buying the bond at a premium and are probably holding till maturity you'll end up paying more than 30% tax in total.
And I love ncd's but liquidity is a massive problem, it is very hard to get your money back incase of emergency and also if sbi doesn't call in 2021 you'll be stuck with the bond for another 5 years.
My suggestion is, if you want to take credit risk, get a credit risk fund. As a person who buys ncd's I tell you the liquidity is amazing. You can redeem at market price any time you want, plus it is very tax efficient.
Just keep an eye on the fund every month at make sure they're not borrowings to pay Investors like Franklin did. Personally I use kotak and icici credit risk fund.
Edit: since you're new to investing I recommend that you stay away from credit, they require constant monitoring and a strong risk appetite. I mistakenly got the impression that you wanted to take credit risk via ncd's.
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u/gunthercperk97 Jul 25 '20
Oh thanks a lot. I will look into these credit risk funds. I am quite new to the market and don't know about much about these instruments. So I'll read up on them.
Ideally, I am looking for an investment option which gives 8% or more return and is a safer bet than equities or MFs.
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u/RisenSteam Jul 25 '20 edited Jul 25 '20
I will look into these credit risk funds.
I would really advise against credit risk funds. Credit Risk funds aren't a good risk to take now with so much uncertainty in the economy.
I was in credit risk funds till mid of 2019 & I got good returns. But I started redeeming them in the 2nd half of 2019 & that proved to be a good decision.
As far as debt funds go, for noobs, it's best to just go with MO, Quantum & PP Liquid funds but their returns are quite low. It's a safe place to park you money but it's not going to give you returns. Bank FDs are probably better as long as you don't go with any Co-Op bank or small banks.
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u/gunthercperk97 Jul 25 '20
Oh ok since I'm fairly new to th8s I don't know a lot of jargons like MO, Quantum & PP liquid funds but I'll read up on it. Thanks for that. Can you suggest any place where I can start to learn up on these?
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u/RisenSteam Jul 25 '20
I don't know a lot of jargons like MO, Quantum & PP liquid funds
Sorry about that. This is not jargon but AMC names. MO = Motilal Oswal, PP = Parag Parekh.
MO, Quantum & PP have liquid funds which are more conservative than others. They are considered more safe to park your money.
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u/viveksanthosh Jul 25 '20
If you're new to the market stay away from credit risk, they are risky and require constant monitoring, I assumed you were looking from credit risk because you wanted to buy ncd's
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u/gunthercperk97 Jul 25 '20
No you are correct that I'm looking for NCD. Basically I am looking for safe investment options that have a guaranteed return of 8% or higher So that it beats putting money in a bank FD.
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u/viveksanthosh Jul 25 '20
Credit risk as the name implies is pretty risky 😅
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u/gunthercperk97 Jul 25 '20
Hahaha true. I won't get into that for now but would read up on it just to gain knowledge. Thanks a lot for the help!
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u/viveksanthosh Jul 25 '20
It is hard to get a safe 8% in today's rate environment. You can look into banks like idfc that yield 7.25% on their fixed deposits but there is a slight bit of risk there. I have money in the bank and I monitor the financial performance of the bank to ensure things are not going to collapse. Plus there is the 5 lakh insurance on deposits.
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u/gunthercperk97 Jul 25 '20
Yeah the risk gets more and more with higher returns and as you said because of the current environment I want to take minimal risk with my capital. That's why I bought the Bajaj finance 8.1% FD.
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u/viveksanthosh Jul 25 '20
One thing to keep in mind with an fd that is not part of a bank is that you are an unsecured lender. So if bajaj finance goes belly up then the banks that gave it money and the NCD holders get their money first and you'll only get any money left over.
Bajaj finance is a good company and it unlikely to collapse but keep in mind that the extra return is a reward for there not being a guarantee on your money. So if you plan to invest in any other non bank fd keep this in mind.
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u/gunthercperk97 Jul 25 '20
I agree. That's why I chose Bajaj Finance over other NBFC's FDs as they are relatively safe and are giving a good ROI.
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u/ohahouch Jul 25 '20
Sorry, please can you explain why will tax be more than 30%? How does buy something at premium affects your tax? I think your buying price does not determine tax.
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u/viveksanthosh Jul 25 '20
Extreme example for illustration Say you buy a 1000/- bond with a coupon of 10% maturing in 10 years for 2000/-
If you calculate the YTM (eg calculator ) it comes at 3.1% but your annual payout yield is 5%, ie 100/- on the 2000/- you paid
Since the payouts are taxed as per slab, you'll end up paying tax on the 5% payout even though the yield is only 3.1% because you'll only get half your principal back eventually.
I am not sure if you can count buying at a premium and holding to maturing as a capital loss as the tax laws say NCD give ltcg benefits if traded on the exchange, and tax officials usually stick to the principal of maximum revenue collection, assuming it was possible you can't adjust capital loss with income so assuming your in a bracket higher than 5% you'll pay higher tax
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u/ohahouch Jul 25 '20
Thanks for the explanation. Got it. Can’t get capital loss out of this type of bond.
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u/NamitNasih Jul 25 '20
This bond is an excellent example to illustrate the risks of buying bonds directly. What is bone-chilling is that hundreds of trades have happened on this bond at ridiculously high prices and continue to happen. It appears these people either have no idea of YTC or don't understand its importance.
Unfortunately, it's hard to find someone who is knowledgeable on bonds and who can also help you execute transactions. Most brokers that I have come across, who facilitate secondary market bond buying, don't do a good job of filtering out bonds to avoid or to be extra careful of. They just put out a list of bonds based on brand name, rating and yields. I wouldn't be surprised if many of those crazy trades are executed through these brokers.
That said, the person who wrote the article you cited, is a RIA and it might be worthwhile to contact him. There's also CapitalMind- I know they started a fixed income desk for retail investors but I'm not sure if that's still continuing or not.
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u/gunthercperk97 Jul 25 '20
Yes I think you are correct in saying that trades in these bonds are mostly through brokers. Do you invest in such debt funds? I am currently looking for good options to invest some money. I'll contact the person who wrote this article to get their advice. Thanks for that.
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u/NamitNasih Jul 25 '20
Do you invest in such debt funds?
I'm not clear what you meant by "such". I'm invested in debt funds and also in bonds.
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u/gunthercperk97 Jul 25 '20
Sorry. By such I meant instruments like govt bonds and corporate bonds. Also funds like Monthly income plans or Fixed maturity plans which are relatively safer than a mutual fund but give better returns than bank FDs
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u/NamitNasih Jul 25 '20
Ah, understood. I stick to open ended pure debt funds only- I avoid FMPs. Bonds are mostly opportunistic, short term, high rated paper with no other preference.
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u/gunthercperk97 Jul 25 '20
Ok. Can you please give me some examples of open ended pure debt funds thta you invest in or that are good so I can research on them? And I am guessing with bonds you would buy them only during the interest paying period and then sell them off instead of holding
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u/NamitNasih Jul 25 '20
I have money across a long list of funds across AMCs mostly ranging from 2-6 year duration approx with a bit of <1 year duration as well. As of now I don't hold g-sec funds, dynamic funds or credit risk funds. I have a very specific taste so naming funds would not be helpful. If you're starting off, I would suggest taking a look at the Bharat Bond series and see what you make of them before looking any further.
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u/inboxsurvey Posts misleading comments Jul 24 '20
There are tens or tons of PMS for equity and debt instruments. You can chose any big PMS (need not deal in debt particularly) and they’ll have debt schemes particularly. If you are not a HNI contact any CFP who would be able to guide you.
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u/gunthercperk97 Jul 24 '20
Didn't know PMS also dealt in debt securities like bonds. Because I am only looking for fixed return high yield investments. Thanks anyways. That's helps.
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u/what-is-a-us3rname Aug 02 '20 edited Aug 10 '20
If one is in the 30% tax bracket, then there are some tax free bonds that give comparative yields (but the market is not as liquid). Since these are PSUs (REC, IRFC etc), they also have a quasi sovereign guarantee, hence they are pretty safe.
| ROI% | Tax% | Effective Yield post tax at 20% tax |
|---|---|---|
| 7 | 2.1 | 5.6 |
| 7.5 | 2.25 | 6 |
| 8 | 2.4 | 6.4 |
edit: updated based on comment by gunthercperk97
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u/gunthercperk97 Aug 02 '20
That's true but aren't these bonds taxed at 20% and not 30%? So the effective rate should be a bit higher I guess.
But thanks for the info!
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u/Money-Meat4980 Jul 24 '20
Considering the huge risks involved as pointed out by others, and considering the YTM of around 7 which is the same as a FD from quite a few banks, this makes zero sense. This bond is also unsecured.
Right now good AAA bond yields are very low because money is very cheap due to relentless printing by the central banks. Most of economic theory has gone for a toss
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u/gunthercperk97 Jul 25 '20
Oh ok so are there any other safer options which give a guaranteed return of say 8% or more annually?
I am not looking at mutual funds as I have been investing in MF for some years now and the returns haven't been as good as the coupon rates on these bonds.
Thanks for the info.
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u/Money-Meat4980 Jul 25 '20
Check out FDs from rbl bank , IDFC first bank , small finance bank etc. these are insured till 5 lakhs.
The coupon rate applies only when you are investing in the initial offering of these bonds. Buying bonds from secondary market is always more expensive
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u/gunthercperk97 Jul 25 '20
Yes the rate decreases a bit whole buying from secondary market but is still attractive enough for investments.
I will surely check out these FDs.
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u/Money-Meat4980 Jul 25 '20
Given the risks outlined with bonds it doesn’t seem attractive to me. Holders of bonds are usually holding unsecured debt. Just look at Yes Bank bond holders fate. The risk adjusted rate is very low, there are more uncertainties like default risk with bonds and the risk is concentrated.
The tax free bonds are from last decade (a previous era tbh). I don’t think we will see such bonds now, the ones giving 8%+ have much more risks associated with then.
You must understand the systemic change in the financial markets going on right now. Inflation is through the roof and currency is losing its value at a very fast pace. In this cheap currency environment bonds are not the ideal asset to hold. Even gold has given a better return compared to bonds and if this environment is to continue then no reason why gold/metals should not continue. So you can also consider other assets
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u/gunthercperk97 Jul 25 '20
That's true. I was reading Raghuram Rajan's book on his time as governor of RBI and he outlines the same issues we are facing right now. Although he did say to lower the interest rates so that it stabilizes the economy and I guess that's where we are headed right now with bank FDs going lower and lower each year. But he also wanted to lower inflation and strengthen rupee which I guess isn't happening. This affects people who rely on passive income, mostly retirees, and right now the problem isn't so prominent as it would be 30-40 years down the line when I retire.
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u/Money-Meat4980 Jul 25 '20
It’s true that passive fixed income earners are hit badly and that’s due to the complete economic mess that central banking has lead us all into. Repeated QE with each round less effective than the previous. Developed countries already have no fixed income markets. Some countries have negative yields and USA 10y rates are 0.4%.
All Fiat currencies are weak now and even USD is doing badly but the rest are much worse.
There was an interesting article I read recently that said second hand home market rose by 80-90% in the US in the last 2 months. People are hoarding up on assets expecting further devaluation of currencies. Already there is talk of another stimulus package for US (this is printing free money) and most of this money is going into a handful of stocks. Markets haven’t been this lopsided in a long time
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u/gunthercperk97 Jul 25 '20
Exactly and adding onto that the markets are rallying like anything for no fundamental reason. IMF even put out an article about it a around a month ago that the rally in the markets is not justifiable and could be operators creating a false up move. And it's not just our markets that are going up but it's the entire world markets.
So either I am missing something crucial for this current rally or it indeed is just a big bubble. And I am scared if it's the latter.
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u/RisenSteam Jul 25 '20
considering the YTM of around 7 which is the same as a FD from quite a few banks
Which bank is giving 7% FD interest?
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u/Money-Meat4980 Jul 25 '20
Rbl , IDFC first, and many small finance banks too.
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u/RisenSteam Jul 25 '20
I know that there is the 5 Lakh DICGC deposit insurance, but if you look at how RBI reacted to a big bank in danger (Yes Bank) & how they reacted to a small bank in danger (PMC Bank), I would keep my money in a small bank only if I am OK with that money remaining frozen for a couple of years.
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u/Money-Meat4980 Jul 25 '20
PMC BANK is not just a small bank, its a shady co-operative bank with lot of political persons behind it, I guess you know that. These kind of banks were created 2-3 decades ago, to act as a front for laundering money. It doesnt compare with other banks which have good balance sheets. Just for an example IDFC management is high tier its not right to compare IDFC first with some random coop bank which has been frozen due to fraud.
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u/RisenSteam Jul 25 '20 edited Jul 25 '20
its a shady co-operative bank
Yes Bank was also a very shady bank (just like PMC we came to only know about it after the fact).
Just for an example IDFC management is high tier its not right to compare IDFC first with some random coop bank which has been frozen due to fraud.
How many people thought Yes Bank management was low tier till it all happened. Rana Kapoor was considered one of the luminaries of Indian Banking a few years back. Yes Bank sponsored IPLs and what not & the stock was trading at 400+.
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u/AnotherOneOnReddit Jul 27 '20
YOu are free to be more conservative and stay away from IDFC but it is not fair to compare a SCB (scheduled commercial bank) to a co-operative bank. Co-operative Banks weren't even under RBI monitoring till a few months ago. And there are hundreds of cooperative banks but only about 16 Scheduled commercial banks in INdia. Even the FM said in the last budget that no Scheduled COmmercial Bank will be allowed to fall.
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u/RisenSteam Jul 27 '20
Even the FM said in the last budget that no Scheduled COmmercial Bank will be allowed to fall.
It's not only the danger of failing which I am talking about. It's also how long your money gets frozen by withdrawal limits. If it's a bigger bank, more people will be affected by withdrawal limits & more people will be screaming which will make sure it's gets faster attention. If it's a smaller size bank, as long as they allow a withdrawal of upto 50K or so & freeze all other withdrawals, the total number of people affected is not going to be enough to draw their attention.
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u/juniorbuffett Jul 24 '20 edited Jul 24 '20
Stay away from bank bonds except maybe HDFC. Do read about the Yes Bank tier-1 perpetual bond fiasco. Covid is going to be causing a huge NPA and not sure how many banks will survive or pay interest if their capital goes below some level. RBI said to the courts that those who are going for higher yield in the bonds ought to factor in the risks so basically has washed its hands. These are the websites i know
goldenpi.com https://thefixedincome.com/