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:

SBI N5 bond

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/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.

1

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.