Mumbai: High net-worth investors (HNIs) continue to chase listed tax-free bonds because of the fall in returns in other safe debt products. Since the interest is tax-free, pre-tax effective returns will also be high for them. But this rush is pushing up the prices of tax-free bonds and bringing down their yield to maturity (YTM). For example, YTM on most of these bonds are only around 4.5 per cent now.Investors should, however, consider capital gains tax and other transaction costs while planning a switch. For example, assume that you hold PFC tax-free bonds with a coupon of 8.92 per cent. Since it is quoting at 1,430, the brokerage at 0.5 per cent will be around 7. The 10 per cent tax on capital gain of 430 (i.e. 1,430 – investment cost of 1,000) will also make you poorer by 43. That means, the net proceeds you will have is only 1,380 and YTM on that works out 4.95 per cent.79932715Should existing investors shift from tax-free bonds? It depends on two factors – first, where you are going to invest the sales proceeds; and second, the tax bracket you are in. “If your holding in tax-free bonds is small, switching to PPF is the best option. Sell slowly and invest 1.5 lakh per annum in PPF,” says Anil Rego, founder, Right Horizons.In addition to the tax-free status, current returns (i.e. 7.1 per cent) offered by PPF is also great.What are the options for people who hold tax-free bonds in large numbers? Fixed deposits from PSU banks or large private sector banks offer only around 6 per cent. A taxable 6 per cent doesn’t make sense for people in the 20.8 per cent tax bracket or above. If you are ready to lock-in money for 7 years, you can consider the floating rate RBI bonds. Switching to RBI bonds will be beneficial for investors in the 20.8 per cent tax bracket and not for people in higher tax brackets.There is no reason to get worried about the floating rate nature of RBI bonds also. “7.15 per cent floating rate is a good option because investors will benefit when the rates start moving up,” says Rego.While everyone agrees that rates will remain low now, it can’t remain this low forever. “Interest rates will start moving up later, maybe after a year, once economic activity picks up and GDP starts showing decent growth rates,” says Subramanya SV, co-founder, Fisdom.