Fintotal News Analysis | PFC Tax-Free Bonds Issue 2012-13: Should You Invest?
PFC Tax-Free Bonds Issue 2012-13: Should You Invest?
Ruby Jacob, 11 Dec 2012

Power Finance Corporation Ltd's (PFC) public issue of tax-free bonds of Rs 1000 crores will be open for subscription between 14th and 21st December. For retail investors the 10 year series bonds carry a coupon rate of 7.67% and 15 year series bonds carry a coupon rate of 7.86%.

PFC tax-free bonds have face value of Rs 1000 per bond and minimum of 5 bonds have to be purchased. Retail investors can subscribe for bonds worth a maximum of Rs 10 lakhs. Allotment is on first come first served basis and 40% of the issue is reserved for retail investors.

PFC is PSU that finances power sector activities in the country. If you are an investor in higher tax brackets and have funds to park for the long term in safe fixed-income securities PFC tax-free bonds are a good bet. The bonds have been rated AAA.

Retail investors have two reasons to look beyond FDs to tax-free bonds for their long term fixed income investments. Firstly tax-free bonds have higher effective yield. Fixed deposit interest is taxable whereas interest on PFC bonds is tax-free. Effective yield is different for different taxpayers based on the tax slab they fall under.

Effective yield is calculated as coupon rate/ (1- tax rate).10 year fixed deposits interest is in 8.5-9% range. Compared to this interest effective yield of 10 year REC tax-free bonds is 11.09% for investors in 30.9% tax slab. For those in 20.6% slab effective yield is 9.66% and for those in 10.3% slab it is 8.55%.  For those whose income falls in higher tax brackets investing in tax-free bonds is better than FDs.

Bond investors can also benefit from capital appreciation if the bonds are not held to maturity. These bonds will be listed on exchanges where investors can find interested buyers and sell them for a higher price than they bought it for. If yields go down (as interest rate comes down, which is what is expected by many experts) price of the bonds would rise. However this is not a big reason for investing in these bonds because tax-free bonds are not traded as much as the usual bonds.

A couple of more infrastructure companies are expected to raise funds through tax-free bonds before March 2013. But if you have the funds don't wait any longer since if RBI cuts interest rate cut beginning mid December yields on forthcoming issues can be lower. You can apply through any 5 Lead Managers of this issue: SBI Capital Markets Ltd, ICICI Securities Ltd, A K Capital Services Ltd, Enam Securities Private Ltd, Kotak Mahindra Capital Company Ltd. Or simply visit 

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