Lock into tax-free bonds for higher yields than FDs

With the volatile markets and rising interest rates, smart investors, especially those in the highest tax bracket,

are opting for tax-free bonds to earn higher post-tax returns than bank fixed deposits.

Yields on tax-free bonds have moved up to around 6% now, as compared with around 4.5% a year ago.

 In contrast, interest on bank fixed deposits is in the 4.5-5% range in the short-term

Tax-free bonds launched by public sector companies are an ideal instrument for risk-averse retail investors.

 Investors can now buy tax-free bonds of public sector companies such as NHAI, PFC, REC, IRFC, Hudco, Nabard, etc, from the stock exchange;

these were issued by the government between 2012 and 2016, for tenures up to 20 years.

 However, the supply of tax-free bonds is limited as there have been no fresh issuances over the last six years.

Target maturity funds invest in government securities, bonds of public sector companies and state development loans.

 The default risk is lower as compared with other debt funds, and the duration of the fund keeps falling with time.

The bonds in the portfolio are held to maturity and all the interest payments are reinvested in the fund.

Tax-free bonds launched by public sector companies are an ideal investment option to build a retirement portfolio

Post-tax returns for tax-free bonds are higher than those of bank fixed deposits

The supply of tax-free bonds is limited as there have been no fresh issuances over last six years

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