Here is the edited transcript of the interview on CNBC-TV18.
Q: REC has recently announced a very large tax free bond. Would you advise your clients to invest in RECs, particularly in context that equity markets have started seeing a bit of a revival? Also, this time around the investible limit has been hiked to an unprecedented Rs 10 lakh per investor. How much investment is advisable and what kind of yield are you expecting, given these bonds will be listed as well?
A: Let me clarify that only the interest earned from these bonds is tax free and there is no tax exemption on the investment amount. I believe these bonds provide a good opportunity for investors to lock-in their money for longer periods. There are two options of 10 year and 15 year bonds and these are safe bonds, these are AAA rated bonds and they should buy REC which is a Government of India owned corporation. Even in terms of liquidity, there is going to be enough liquidity in the 10 and 15 year bonds by way of listing at NSE and BSE.
I think these are definitely good options and as far as coupon is concerned, it is 7.22 percent for 10 year option and 7.38 percent for 15 year option. But, for retail investors who have been defined as the ones who will invest upto Rs 10 lakh, will get additional 50 basis points, meaning it is going to be 7.72 percent for 10 year bonds and 7.88 percent for 15 year bonds. The issue size is around Rs 4500 crore and 40 percent of it has been earmarked for retail investors. The minimum investment is Rs 5000 which is five bonds and thereafter, in multiples of Rs 1000.
In terms of liquidity, I think there is going to be ample liquidity by way of listing. The major attraction for investors here is the tax free status of the dividend. What typically happens is if we take an example of someone who is in the 30 percent bracket, the pre tax return comes to around 11.25 percent. Now, it is very hard to find an option where one is assured of getting around 11 percent plus pre-tax return over a 10-15 year period. That too in an option where these are issued by government owned organizations where money is safe.
In terms of allocation, I would say that investors need to be a little careful. I believe they should only be putting in that amount which is earmarked for their debt portfolio, especially the one which can be kept aside for the long-term. I don't think it will be a great idea to think of taking money out of their equity portfolio or money which is earmarked for equity portfolio for investing in this bond.
I strongly believe that over a period of 10-15 years, equity can definitely give better returns. There is something called asset allocation. I think there is a place for every asset class in the portfolio. Out of a debt portfolio, I think specially the money which can be kept aside for a longer period is a pretty good option.
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