While the Reserve Bank of India (RBI) has increased the interest rate of Floating Rate Savings Bonds (FRSBs) to 8.1% (October 30, 2023 to April 29, 2024) and has also enabled subscription through its Retail Direct Portal, a web-based platform for investing in government securities, risk-averse investors should note that such bonds are more attractive in a rising interest rate environment.
Experts say investors must keep in mind that we are at the peak interest rate which is likely to come down once the inflation outlook improves. So, when interest rates fall, the coupon of FRSBs will also come down. In such a case, locking at current bank fixed deposits or small savings would be more attractive over an investing period of five years.
The FRSBs have a tenure of seven years and the interest payout frequency is half-yearly. While the minimum investment amount is Rs 1,000, there is no upper limit of investment in these bonds. The returns are fully taxable as per the individual’s marginal tax rate. The coupon will keep varying during the tenure and will be fixed based on the rate of interest of National Savings Certificates (NSC) plus a spread of 0.35%.
Peaking of interest rates
Adhil Shetty, CEO, Bankbazaar.com, says the FRSB offers assured returns, capital protection and the sovereign guarantee is attractive. “However, in the current environment, a peaking of interest rates will be followed by a fall in rates. Therefore, the returns on NSC and by extension FRSB will fall as well in the near future. If you are a senior citizen you could lock into a 7.5 to 8% fixed deposit for an assured return of a similar time-frame.”
Similarly, Sushil Jain, CEO, PersonalCFO.in, a wealth management firm, says investors should lock in at
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