Tax-free bonds: Is it a good bet?

Q: Explain all these spotlights that are there on the tax-free bonds. How much does that add to the reward that I get at the end of the tenure for which I am investing?

A: I am not a big believer of tax-free bond for simple reason that if you are a high net worth individual and you invest in mutual fund and you disinvest after one year, you just pay 10 percent long-term capital gain but when you invest in a tax-free bond, government take a calculation saying that all investors are in highest bracket. So, he starts from day one paying highest tax slab.

It is a tax-free bond, nice but in a ten year period you find many times capital losses in your books. So, if you have a mutual fund bond portfolio and you have a capital losses somewhere else then you can adjust these things which is not possible in tax-free bond, for instance if you are running a business; you have a business of investing and that you have some losses where many people keep having for various reasons. Now you have a taxable instrument like mutual fund or lower instrument like mutual fund, you can adjust those. So, I am not a big believer in tax-free bond and I do not think they serve much purpose to the investor but the lure of them is too high for many investors to avoid.