Imp Limitations Of Tax Free Bonds:

A number of  Public Sector companies are coming up with issues of Tax Free Bonds and till most of them have received good response.Issues like REC have over subscribed within few days.

All the bonds are offering annual tax free interest income but till their are limitations of these bonds which investors need to consider and invest accordingly.

1. No inherent compounding:Tax free bonds won’t offer advantage of compounding effect unlike instrument like PPF as they do not offer any cumulative option.so these bonds offers less advantage to investors who are in accumulation phase so such investors who are expecting regular income for next 8-10 years first should complete the limit of PPF and then consider the option of tax free bonds.
2. Liquidity : Tax free bonds do not offer Call or put option means either investors or companies will not able to prematurely end the contract.These bonds are for enough longer tenures like 10 -20 years and so investors need to ascertain about money required in future.Bonds held in demat form can be sold in secondary market but its difficult to get buyer in secondary market or investor may need to settle with discounted rate.
3. Benefits of changing market conditions:Tax free bonds are for sufficiently longer period like 15-20 years and within this period significant investment opportunities can come up.

Tax free bonds are good option for such investors who is looking for pension like annual income and not for young investors who may require compounding effect to make money.