RBI Bonds Think Twice Locking into with Rate at Their Peak

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Floating Rate Bonds:-

The Reserve Bank of India has recently increased the interest rate on Floating Rate Savings Bonds (FRSBs) to 8.1% until April 29, 2024.

Additionally, subscription through its Retail Direct Portal, a web-based platform for government securities investment, is now available.

However, it’s crucial for conservative investors to recognize that FRSBs are typically more attractive in a rising interest rate environment.

With the current peak interest rates, there is a likelihood of a decrease when the inflation outlook improves.

Consequently, as interest rates fall, the coupon rates of FRSBs will also diminish.

Under these circumstances, traditional bank fixed deposits and small savings may become more appealing for those looking at a five-year investment horizon.


Floating Rate Savings Bonds Overview:-

Floating Rates Savings Bonds (FRSBs) come with a seven-year maturity, featuring half-yearly interest payments.

These bonds have a flexible investment entry point with a minimum requirement of Rs 1,000, and there’s no maximum investment limit.

However, it’s essential to be aware that the returns from these bonds are subject to taxation in line with your individual tax rates.

The unique aspect of FRSBs is the variability of coupon rates.

These rates are based on the interest rate of National Savings Certificates (NSC) with an additional spread of 0.35%.

Therefore, the returns from these bonds can fluctuate during the tenure.

It’s important to keep in mind that while these bonds currently offer an attractive interest rates at 8.1%, it’s not guaranteed to remain at this level.

As per experts, we are currently experiencing a peak in interest rates, and these rates may decrease when the inflation outlook improves.

Consequently, the coupon rates on FRSBs will also adjust to reflect these changes.

In this scenario, consider bank fixed deposits or small savings for a five-year investment.

FRSB Investment Considerations:-

Adhil Shetty, Bankbazaar.com CEO, highlights the appealing features of Floating Rates Savings Bonds (FRSB), such as assured returns and capital protection backed by a sovereign guarantee.

He also advises considering the current interest rate scenario.

With interest rates peaking now, a future decline is likely, which will affect the returns on National Savings Certificates (NSC) and, consequently, FRSBs.

Shetty suggests that senior citizens might opt for 7.5 to 8% fixed deposits for assured returns within a similar timeframe.

This strategic move can provide a steady income source during uncertain interest rate fluctuations.

Choosing Fixed Income Investments:-

Sushil Jain, CEO of PersonalCFO.in, advises locking into high bank deposit rates for long-term returns.

Floating rates provide short-term benefits, as long-term rate hikes aren’t anticipated. These bonds offer no early exit except for senior citizens over 60, and they aren’t collateral or tradable.

For risk-averse investors, exploring various fixed-income options with longer tenures during high interest rates is a wise choice.

Some banks offer special fixed deposits with higher interest rates for 5-year deposits.

The post office also provides a 7.5% interest rates for its 5-year time deposit.

Attractive Options for Senior Citizens:-

Senior citizens can earn high interest rates of up to 8.6% with small finance banks.

The Senior Citizens Savings Scheme Account offers an attractive 8.2% return with a lock-in period of five years.

Also read:- https://telecastindia.in/index.php/2023/11/04/pollution-increase-by-real-estate/

Salaried employees contributing to the Employees’ Provident Fund (EPF) can opt for additional voluntary contributions to earn tax-free returns of 8.15%.

They can contribute up to 100% of their basic salary and dearness allowance to the Voluntary Provident Fund (VPF).

This translates to tax-free returns on their EPF savings, providing a solid and reliable option for tax-efficient retirement savings.

Senior citizens can explore these options for enhanced returns and secure their financial future.


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