009, Not 007: Why you should dump Mr FD for Mr Bond

Forget 007. Think 009. The name is still Bond, but not James Bond. It’s Tax-free Bond. For savers thinking of growing their nest egg, an 009 percent tax-free Mr Bond is sexier than 007.

If you are the typical risk-averse fixed-deposit type, this is the time to throw caution to the winds and take a plunge into the low-risk, higher reward pool of tax-free bonds. A Bond in swimming trunks diving into the pool is always more interesting than a fixed deposit trussed up in woollies and vegetating in a bank.

Thanks to still high inflationary conditions, interest rates on public sector tax-free bonds have never been higher, with 10-20 year tax-free bonds offering coupons in the range of 8.66-9.01 percent for retail investors (NTPC, Hudco and IIFCL are coming to the market this month). This means whatever the tenure, and whether you are in the lowest tax bracket or the highest, you can beat almost any safe bank FD return.

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For those in the lowest brackets, minimum pre-tax returns on the shortest tenure are near 10 percent; for those willing to go for the longest tenures and who are in the highest brackets, pre-tax returns are as high as 12 percent. Returns in the range of 10-12 percent not only beat FDs hands down, but are nearly as safe.

And not to forget, tax-free bonds handily beat inflation.

Even those who pay no taxes save at least on hassle. You don’t have to harangue your banker for wrongly deducting TDS on your FD income or for failing to submit form 15 G or form 15 H (the latter for senior citizens).

Surely, am I painting the tax-free bond as some new hero with no flaws to his character?

Not quite. But the flaws are few - and one can live with them.

The first flaw of Mr Tax-Free Bond is that he is a bond and not an FD. You have to hold him (preferably) in demat form, and his value can fluctuate daily based on market moods. But then who said Bond was not a quick mover? If you are willing to trade the dour boringness of Mr FD for an exciting life with Mr Bond, your get into the fast lane. Remember, with Bond on your side, you can’t be safer.

The second flaw is less “interesting”. If interest rates are expected to rise, Mr Bond could slip on a banana peel and see prices slide. But not to worry. Like the proverbial cat, Mr Bond always lands on his feet. Never mind what happens to Mr Bond’s market prices, if you hold them to maturity, you get all your capital back. Some public sector tax-free bonders will seek to buy back outstanding tax-free bonds at a small premium.

The third flaw in Mr Bond is the perception of lack of safety. Are public sector bonds safe? Well, the question is: how safe are bank deposits. If a bank goes bust, only Rs 1 lakh of your money is insured. Of course, no government is going to let any big bank fail, but do you think public sector tax-free bond issuers can afford to default or say, sorry, we can’t repay? This is akin to a sovereign default - and no government is likely to let a public sector institution default or go bust. Remember, even PSUs fit for euthansia - Air India, MTNL, et al - are being fed intravenously to keep them alive even when they appear brain dead.

In short, dump Mr FD and grab Mr Bond. If you are female, remember they don’t come sexier than Bond. If you are male, remember wherever Bond goes, female company is seldom missing.

Go for it. It is time to shed your inhibitions. 009, Mr Tax-Free Bond, is licensed to Thrill while 007 was only licensed to kill.