RBI Floating Rate Savings Bonds at over 8%: Is it the right time to invest? Key features to know
RBI Floating Rate Savings Bonds: Looking for a secure investment with an interest rate over 8%? Let’s talk about RBI Floating Rate Savings Bonds (FRSBs) 2020 (Taxable). Currently, these bonds offer an interest rate of 8.05% per annum, making them an attractive choice among debt investments. Will this rate remain stable? How is the interest rate calculated? If you’re considering investing in these bonds, here’s what you need to know.
RBI Floating Rate Savings Bonds interest rate calculation
As per an ET analysis, the interest rate of RBI Floating Rate Savings Bonds 2020 (Taxable) is not fixed, as the name implies. It’s changed every six months and is due on the next July 1. This rate is tied to the interest rate of the National Savings Certificate (NSC), a government-backed small savings scheme. The interest rate on RBI Floating Rate Savings Bonds is typically 0.35% higher than that of the NSC.
The interest rate of the National Savings Certificate (NSC) is reviewed every quarter. If the NSC interest rate rises, the interest rate on RBI Floating Rate Savings Bonds will also increase. Conversely, if the NSC interest rate falls, the interest rate on the RBI Floating Rate Savings Bonds will decrease as well.
RBI Floating Rate Savings Bonds’ 8.05% interest rate from July 1
Currently, the NSC offers a 7.7% interest rate for the April-June quarter. According to the established formula, it’s expected that the RBI Floating Rate Savings Bonds 2020 (Taxable) will indeed sustain their high-interest rate of 8.05% from July 1, 2024, for the subsequent six months, the report said.
Key features of RBI Floating Rate Savings Bonds to consider
Before investing in RBI Floating Rate Savings Bonds for their high-interest rate, it’s important to understand their features. These bonds, issued by the Reserve Bank of India on behalf of the Government of India, come with a seven-year lock-in period.
The interest rate of RBI Floating Rate Savings Bonds is reset twice a year, with interest payouts occurring semi-annually on January 1 and July 1. The interest earned is taxable, and investors cannot claim any tax deductions on their investment.
While there’s no option for premature withdrawal, senior citizens can withdraw funds early with a penalty after a minimum lock-in period. The lock-in period varies based on age: six years for those aged 60 to 70, five years for those aged 70 to 80, and four years for those above 80.
Is investing in RBI Floating Rate Savings Bonds a good choice?
In case of fixed deposits in banks, only a few banks provide an 8% interest rate. Most renowned banks offer rates ranging from 7% to 7.85% on fixed deposits. In terms of interest rates alone, RBI Floating Rate Savings Bonds offer slightly higher returns with sovereign guarantees. Unlike fixed deposit interest rates, which are typically fixed at the time of deposit, the interest rate on RBI Floating Rate Savings Bonds can fluctuate during the bond’s tenure. This volatility can sometimes benefit investors when rates increase, but it may also lead to a loss of interest if rates decrease in the future.
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Hence, investors should consider two limitations: the fluctuating interest rate and the absence of liquidity options for general customers when considering RBI Floating Rate Savings Bonds as an investment option.
Despite these limitations, RBI Floating Rate Savings Bonds remain appealing to many investors. Raghvendra Nath, Managing Director of Ladderup Wealth Management Private Limited was quoted as saying, “It is no doubt one of the highest-yielding debt instruments available in India currently, so anybody who has excess liquidity and does not need the money for seven years can look at it.”
Investors seeking a safe place to park their funds and earn regular interest may find RBI Floating Rate Savings Bonds appealing. However, Anshul Gupta, Co-founder and Chief Investment Officer of Wint Wealth, advises investors to be aware that payouts may decrease when interest rates fall. Therefore, they shouldn’t rely solely on floating rate bonds for consistent income.
For those considering investment in RBI Floating Rate Savings Bonds, it’s essential to note that interest rates appear to be at their peak and are expected to remain high for at least a quarter or two before potentially decreasing, according to Raghvendra Nath.
Bhavik Thakkar, CEO of Abans Investment Managers, points out that while bank fixed deposit rates are closely tied to changes in the repo rate, National Savings Certificate (NSC) rates don’t experience the same level of volatility. Over the past decade, NSC rates have ranged from 6.8% to 8.5%. Currently, most banks offer rates of around 7-7.50% for deposit periods of three to four years, with lower rates for longer durations.
In comparison, RBI Floating Rate Bonds offer a seven-year investment period, providing an opportunity to secure higher rates for extended periods while benefiting from sovereign credit safety.
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