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Looking For Regular Cash Stream?

By Karthik Jerome
Last updated on: November 06, 2023 12:03 IST
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Investors looking for a fixed-income product that is free of credit risk may invest in these bonds.

IMAGE: Kindly note the image has been posted only for representational purposes. Photograph: Amit Dave/Reuters

Retail investors can now purchase Floating Rate Savings Bonds (FRSBs), 2020 (Taxable) through the Reserve Bank of India's Retail Direct portal.

While this development will make it more convenient to purchase these bonds, investors must check their suitability before they opt for them.

Rate linked to NSC

The interest rate offered by FRSBs is linked to the interest rate offered by the National Savings Certificate (NSC). The rate is the NSC rate plus 35 basis points (0.35 per cent).

When the NSC rate gets revised, the returns of these bonds also change. Rates of small savings instruments, including the NSC, are reset every six months -- on January 1 and on July 1.

"There is no limit on the amount one can invest in these bonds," says Arnav Pandya, founder, Moneyeduschool. These instruments are non-tradeable.

Downside is protected

These bonds, which are backed by the Government of India, are risk-free. Their current rate of return of 8.05 per cent is attractive.

"In a rising rate environment, the rate offered by these bonds goes up," says Pandya.

Experts say the government does a balancing act in these instruments.

While the interest rates offered by small savings instruments may not rise as much as the yields on other market-linked instruments in a rising rate environment, they also do not decline as much when interest rates decline.

Says Deepesh Raghaw, a Sebi registered investment advisor: "Small savings schemes (and instruments linked to them) provide a cushion, or at least they have done so until now. During a falling rate regime, their rates do not decline as fast."

According to Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors, "With the general elections around the corner, the interest rate on these bonds is likely to decline at a slower pace."

These bonds do not carry an expense ratio. "The purchase through RBI Retail Direct will not entail any intermediary cost," says Dhawan.

Can't lock in rate

FRSBs do not allow investors to lock in the rate for the entire term. The consensus view currently is that the RBI has probably reached the peak of its rate hike cycle.

"Rates could possibly be cut during the first half of the next financial year, in which case investors would get a rate that is lower than the current level," says Dhawan.

Liquidity is another issue. These bonds are not tradeable and hence cannot be sold to someone else during their tenure. Investors also cannot take a loan against them.

"Only senior citizens are allowed to withdraw their money before the end of the tenure," says Raghaw.

FRSBs also do not offer any tax benefits. No deduction is available at the time of investment. Interest income is taxed at slab rate. This could be an issue for investors in the higher tax brackets.

Invest for reliable income stream

Investors looking for a fixed-income product that is free of credit risk may invest in these bonds.

According to Pandya, those who want a regular cash stream (although the amount may fluctuate), and who have exhausted the limit in other instruments (such as the Senior Citizen Savings Scheme or SCSS) may go for these bonds.

Dhawan adds that investors in the lower tax brackets will also find their post-tax yield attractive.

Avoid if you wish to compound wealth

Younger investors whose income requirements are met by their salary or business income may not find this product suitable.

"Money does not compound in these bonds, so they are not very useful for investors in the wealth accumulation stage," says Raghaw.

With instruments like FRSB, which make a regular payout, there is always the risk (among younger investors) that the money received could be spent instead of being reinvested.

Pandya adds that investors who need liquidity -- who cannot lock in their money for seven years -- should also avoid them.

Investors in the highest tax brackets may also find the post-tax yield on these bonds relatively less attractive.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Ashish Narsale/

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Karthik Jerome
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