What Are Municipal Bonds?

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Municipal bonds are also referred to as ‘muni bonds’. The urban local government and agencies issue these bonds. Municipal bonds are issued when a government body wants to raise funds for projects such as infra-related, roads, airports, railway stations, schools. SEBI of India circulated detailed guidelines in 2015 for the urban local bodies to raise funds by issuing municipal bonds.

Types Of Municipal Bonds In India?

There are two types of municipal bonds in India:

1. General Obligation Bonds

These bonds are issued to raise finances for general projects such as improving the infrastructure of a region. Repayment of the bond, along with interest, is processed through revenue generated from different projects and taxes.

2. Revenue Bonds

These are issued to raise finance for specific projects, such as the construction of a particular building. Repayment with interest done through revenues explicitly generated from the declared projects.

Advantages and Disadvantages Of Municipal Bonds

Advantages:

Minimal Risk: Municipal bonds are issued by municipal authorities, So you can feel safe with these securities.

Transparency: These bonds are issued to the public are rated by renowned agencies such as CRISIL, allows investors transparency regarding credibility of the investment option.

Tax Benefits: Municipal bonds are exempted from taxation if the investor conforms to certain stipulated rules.

Disadvantages

Low Interest Rates

Even though interest rates on municipal bonds, in some cases, are higher than other debt instruments, these rates are considerably low when compared to returns from market-linked financial instruments such as equity shares.

Long Maturity Period

Municipal bonds come with a lock-in period of three years, imposing a burden on the liquidity requirements of investors.

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