Should you invest in NTPC, HUDCO tax free bonds?

NTPC and HUDCO have come out with their tax free bonds. Both the bonds are receiving good interest from investors as the coupon offered is quite high.  The volatility of both debt and equity market is also adding to the attraction towards such fixed interest bonds.

Let's review what these bonds are offering and where investors can consider adding them in their portfolio -

About Companies
NTPC and HUDCO both are government-backed organizations. NTPC is a Maharatna and is raising money after a gap of twenty years. In comparison NTPC is credited with AAA rating while HUDCO carries a AA+ rating from the rating agencies Crisil and ICRA. Although AA+ rating signifies high credibility in timely servicing of financial obligations, a AAA rating is the highest rating giving a highest credibility to any organization.

Features of Bonds
Both these Tax Free bonds are secured Non-convertible redeemable bonds with a fairly long horizon of 10, 15 and 20 year. Post issue they will be listed on NSE and BSE. One can apply with minimum of 5 bonds and thereafter in multiple of 1.  In both issues the bonds will be available in physical and demat form but the trading will take place only for the demat option.   NTPC issue will close on December 16th, 2013 while HUDCO is open till January 10, 2014.

Interest Rates
Both the companies have come out with bonds during high interest rate scenario and so the coupon offered is also on higher side. The retail investors are getting additional 25 basis points on the interest offered to other categories. HUDCO bonds is carrying an interest rates of 8.76% , 8.83% and 9.01% payable annually  for 10 years (Series 1B), 15 years (Series 2B) and 20 years (Series 3B), respectively for Retail Individual investors .  NTPC bond on other side is offering retail individual investors a rate of 8.66%, 8.73% and 8.91% for 10, 15 and 20 years horizon.  In both the issue, the additional interest rate for retail investors is applicable only to the primary investor and not on the second investor to whom the bond is transferred thereafter. There is no cumulative option and so interest is payable annually.

Should you invest
When you compare the two companies then NTPC is surely a much favorable considering its Mahartana status and performance. Its AAA rating is also higher than HUDCO signifying the highest safety of invested capital. Already within few days the bond has received applications for amount far higher than the issue size. However, the interest rate offered is higher in HUDCO bonds reaching to 9% in 20 years horizon.

Here, taxability is not playing a role since interest is completely tax free. So bonds are attractive for all class of tax payers. But one should invest considering own cash flow requirement and allocation to other investment avenues. If you do not require  a regular income then there are other avenues which are more lucrative since these bonds do not carry any cumulative option.  Also if the bonds get more preference from long term investors with regular income needs you may see lower trading volumes on exchange. This may reduce the capital gains opportunity.

Hence, there are few factors to consider before you invest in tax free bonds. If you need a regular income and have a horizon of more than 10 years, then tax free bond suits well. For any shorter horizon for capital gains investment, it's wiser to prefer other avenues such as taxable NCDs by corporates. Most importantly, limit exposure to these bonds and keep your investment well diversified to combat inflation.