Municipal bonds are sometimes also known as ‘muni bonds’. These bonds are issued by urban local government bodies. Government issues municipal bonds when they want to raise funds for projects like roads, airports, railway stations, schools, etc.
Municipal bonds were first issued in India in the year 1997. Bangalore Municipal Corporation was the first urban local body that issued municipal bonds in India. Total Rs 125 crore was raised by Bangalore Municipal Corporation through this issue. Ahmedabad was next in issuing bonds after Bangalore in the succeeding years. The municipal bonds lost the ground after receiving the initial investors’ attraction and failed to raise the required amount of funds. To revive the municipal bonds, the market regulator SEBI issued guidelines for the issue of municipal bonds in 2015.
Municipal Bonds are ranked according to their credit rating before issuing to the public and hence, investors looking for a low-risk investment consider municipal bonds as a secure investment option for their investment portfolio. Municipal bonds provide generally higher interest rates as compared to other fixed-income financial options.
Types of Municipal Bonds in India
There are essentially two sorts of municipal bonds in India, classified according to their use. These are:
General Obligation Bonds
As the name proposes, General Obligation Bonds are given to raise accounts for general projects like improving the infrastructure of a region. Repayment of the bond, alongside interest, is handled through revenue generated from various projects and taxes.
Revenue Bonds
Revenue bonds, then again, are given to raise account for explicit projects, like the construction of a specific building. Repayment of such bonds (principal and accumulated interest) will be paid through revenues expressly generated from the pronounced projects.
Revenue age from projects which are financed with revenue bonds will be deposited in an escrow account. Concerned financial institutions monitor this account.
SEBI Guidelines
A municipality should meet the accompanying eligibility criteria to give municipal bonds in India:
The municipality should not have a negative net worth in every one of the three earlier years.
The municipality should have no default in the repayment of debt securities and loans benefited from the banks or non-banking financial companies somewhat recently.
The municipality, promoter and directors should not be enrolled in the wilful defaulters distributed by the Reserve Bank of India (RBI). The municipality ought to have no record of default in the payment of interest and repayment of principal regarding debt instruments.
Who Should invest in Municipal Bonds?
Municipal bonds are positioned according to their credit ratings before issuance to the public, thus making it a safe investment option for people looking to weaken the risk-factor related with their investment portfolio.
Other than that, few municipal bonds accompany significantly higher interest rates when contrasted with other fixed-income financial instruments.
For example, municipal bonds gave by Pune accompanied a coupon rate of 7.5%, though the Andhra Pradesh Capital Region Development Authority offered an interest rate of 8.9% on their municipal bond funds.
Consequently, elements looking to see the value in their capital while additionally appreciating the assurance of repayment will likewise put resources into these financial instruments.
How to buy Municipal Bonds?
Municipal Bonds can be easily bought through various bond dealers, brokerage firms, banks and sometimes directly from the municipality and these bonds are traded in both primary markets and secondary markets.
If you want to purchase bonds from the primary market, then you will have to follow the process of the retail order period. This is only suitable to the investors who want to invest high amount as these bonds are issued with high denominations. (Retail & Institutional investors don't need to pay any fees for purchasing such bonds from the primary market.)
To purchase bonds from the secondary markets, investor needs a demat account. Secondary markets allows you to buy bonds which are already issued in the primary markets.
What are the Advantages of Municipal Bonds?
There are various benefits of investing in municipal bonds which incorporate –
Transparency
Municipal bonds that are given to the public are rated by famous agencies like CRISIL, which permits investors transparency in regards to the credibility of the investment option.
Tax benefits
In India, municipal bonds are exempted from taxation if the financial backer adjusts to certain specified principles. Notwithstanding such compliance, interest rates generated on such investment apparatuses are likewise exempt from taxation policy.
Minimum risk
Municipal bonds are given by municipal authorities, inferring inclusion of insignificant risk with these securities.
(Also Read: Gilt Funds)
What are the Disadvantages of Municipal Bonds?
The detriments of municipal bonds are enumerated underneath –
Long maturity period
Municipal bonds accompany a lock-in time of three years, forcing a weight on the liquidity requirements of investors. Nonetheless, selling such securities prematurely in the auxiliary market can be testing if the bonds are given by a disliked municipal corporation.
It is on the grounds that, in such cases, elements are dubious about its credibility and yielding limit.
Low-interest rates
Despite the fact that interest rates on municipal bonds, now and again, are higher than other debt instruments, these rates are extensively low when contrasted with gets back from market-connected financial instruments, for example, equity shares.
Substances hoping to put resources into best municipal bonds ought to consider various factors, for example, their risk-hunger, investment goals, investment portfolio and so forth couple with a municipal body's credibility and a bonds' credit rating to discover its liquidity and repayment.
(Also Read: Types of Government Bonds in India)
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