Point to consider before investing in tax-free bonds.

CREDIT RATING

Credit rating of the bond issue signifies the borrower's credit quality in terms of ability to repay principal along with interest. Lower the rating, higher the interest rate. However, it is advisable to buy tax-free bonds which have good credit rating. In most cases, the credit rating will be the highest grade, i.e. AAA.

COUPON RATE

The rate of interest offered by the issuer of the bond is an important factor. The coupon rate of these bonds is benchmarked against the government securities (G-Sec) of equal maturity. While most tax free bonds issued in 2012 and 2013 carried a coupon of around 8.5-9%, the rate will be lower this time around due to softening of benchmark interest rates since then.

TENURE

The tenure of bonds shall be for 10, 15 and 20 years. Typically, higher the bond tenure, higher the coupon on the bond. But it is important that the investor chooses the bond tenure aligned to his or her investing time horizon.

INTEREST PAYOUT

This is the date when the issuer will pay the interest on the bond every year. If you are investing in several bonds to generate a regular flow of income, identify bonds with payout date spread over the entire year.