IIFCL or Hudco: Which of the two tax-free bonds should you opt for?

With the India Infrastructure Finance Company Ltd (IIFCL) hitting the street, the tax-free bond market is becoming rather crowded. Though it has been allowed to raise an additional Rs 8,171 crore in this fiscal year, the company’s first tranche will try to collect only up to Rs 2,500 crore. IIFCL is the third company to come out with a public issue of tax-free bonds in this financial year.

The Rural Electrification Corporation (REC) has collected its quota of Rs 3,500 crore. The Housing and Urban Development Corporation ( Hudco) plans to raise up to Rs 4,809 crore; it had collected Rs 1,943 crore till 3 October.

The IIFCL issue that hit the market on 3 October collected Rs 209 crore on the first day. Since both the IIFCL and Hudco issues are in the market simultaneously, which one should you go for?

“Both are good and investors should diversify in both,” says Rajiv Deep Bajaj, vice-chairman and MD, Bajaj Capital. However, if you want to invest in only one of them, consider the following factors.

First, what is the time period for which you want to invest? Hudco is offering higher interest rates for the 10- and 15-year time periods, while IIFCL is offering higher interest rates for the 20-year period (see table).




Second, there are rating differentials between them. IIFCL is AAA rated, while Hudco is only AA+ rated. Experts, however, say that a one notch rating difference will not matter if the investor plans to hold the bonds till maturity. “Since both are government companies and also highly rated (even AA+ is a good rating), both are practically risk-free,” says Raghvendra Nath, managing director, Ladderup Wealth Management.

The rating differential will come into play if you want to sell these bonds later. An AAA paper usually commands a better price than AA+ paper in the secondary market.

Do not invest for listing gains. REC’s tax-free bonds have already slipped below the issue price due to the number of firms planning to hit the market soon. However, the Gsec yield may start falling once the rupee stabilises. So there might be an opportunity for capital gains in the medium term.