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Should you Invest in Floating Rate Savings Bonds (2020)?
Posted By: Admin
Should you Invest in Floating Rate Savings Bonds (2020)?
Interest rates of Bank Deposits have hit a new low this Feb & March 2021, a one year Fixed Deposit in a large Pvt bank that I bank with is 5% per annum( for senior citizens who are dependent on the interest income this is a massive fall). What's the solution ?
Floating Rate Savings (FRS) Bond of the Government of India is worth a look ?
The government of India had announced the launch of floating rate savings bonds 2020 (taxable) scheme. This bond was launched after 7.75 per cent taxable savings bonds ( popularly called RBI Bonds) were withdrawn on May 28. Floating rate saving bond (FRS) comes with a tenure of seven years and a no maximum cap on the investment size. Both resident individuals and HUF can invest in these bonds, but non-resident individuals are not allowed to invest.
Since this bond is issued by the government of India, there is no credit risk. In these times when investors seek safety and return of capital at the end of the tenure, the floating rate bonds inspire confidence. The interest rate will not be fixed, it will be floating. As and when interest rates rise, these bonds will give a higher interest rate to bond holders. The interest is payable half yearly on January 1 and July 1. There is no cumulative option.
The bonds cannot be traded in the secondary market, nor can be used as a collateral for a loan. However, the government has given some flexibility to the senior citizens. Investors in the age bracket of 60 to 70 years can opt for premature encashment of the FRS after completing six years from the date of issue, subject to conditions. Investors in the age bracket of 70 to 80 years can do so after completing five years whereas for investors above 80 years of age, lock in of four years apply.
FRS pays interest every six months and the quantum of all future interest payouts is not known at the time of investment. Interest income will be taxed as per your income-tax rates. For non-senior citizen investors in the low-income tax bracket this is a good investment option provided they are comfortable receiving interest at floating rate and willing to hold on to these bonds till maturity.
In our opinion, given the low interest rate in banks and the likely increase in interest rates, floating rate bonds make a lot of sense to invest into. Coupled with the safety of the investment and the prospect of increasing interest rates, we believe that a certain portion of Investors Moneys esp Senior Citizens can be allocated to this investment for their regular income needs.
By: Sangeetha
Sherpani, Finsherpa Investment Services
Category Finsherpa | Tags Financial Freedom
