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Sunday, September 01, 2013

Invest in REC Tax Free Bonds for short term 20% upside!!

REC (Rural Electrification Corporation) has come out with TAX Free Bonds with following coupon rates for individual investors (Category IV - upto 10 lakhs)

10 yrs bond: Coupon Rate: 8.26% (Tax Free)
15 yrs bond: Coupon Rate: 8.71% (Tax Free)
20 yrs bond: Coupon Rate: 8.62% (Tax Free)

Assuming an individual investor in tax bracket of 33%

8.26% Tax Free = 12.32% (With Tax @ 33%)
8.71% Tax Free = 13% (With Tax @ 33%)
8.62% Tax Free = 12.86% (With Tax @ 33%)
REC bonds are virtually Risk free hence comparing with Bank FD's..
Bank FD rates are close to 9% and Senior citizen rates are close to 9.5% 

keeping a buffer lets assume that bank FD give us 10% return (Before Tax)

Rs 1000 invested in 8.26% REC Tax Free Bonds is equal to 12.32% taxable bonds.

So Rs1000 invested in REC Bonds will give 123.20 in interest income (before Tax)
Rs1000 invested in BankFD with 10% interest rates will give 100 as interest income..

So the question is how much capital do we need to invest in bank FD to get 123.20?
The answer is 1232/= rupees  invested in 10% bank FD gives you 123.20 in interest income.
REC bonds of Rs 1000/=  face value are going to be listed in BSE 
and "Most Likely" will quote at 1232/= 
8.26% Tax Free = 12.32% (with Tax); Quote at: 1232/= (23.20% gain)
8.71% Tax Free = 13% (With Tax); Quote at: 1300/= (30.00% gain)
8.62% Tax Free = 12.86% (With Tax); Quote at 1286/= (28.60% gain)

So there is a good chance to make a short term 20% profit by subscribing to these REC bonds and selling on listing.. that's a 1 month 20% return.. almost guaranteed..

PN: These are based on an assumption that we are equating REC bonds to 10% FD by banks.. there are finance companies bonds which payout 11% and even 12% (but at lower credit rating)  we have kept a buffer of 0.50% as real bank FD are around 9.5% (Senior citizen)

Personally I think this is a risk free 20% but please do your own deep dive before investing!! I did speak to ICICI Direct folks and they said already around 160Cr is sold on 30th August (1st day) 
This is first come first served basis.. 
This is a 1000Cr issue with over subsription level of 2500Cr 40% reserved for individual investors.!!
Private placement of bonds has already been oversubscribed


Personally I would recommend all investors to invest and then .. short term players can sell on listing (my plan also) there is value also in holding for long term.. only other tax free plan which comes close is PPF and the rates change every year depending on change in GOI Bond rates.(interest rate on PPF is falling..) . and there is a max limit of just 1 lakh 

PN: this is based on publicly available information and my personal opinion.. please do your own deep dive before investing


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