Floating Rate Savings Bonds (FRSB) are gaining popularity in the investment world due to their potential for rising interest rates in the coming months. As investors seek higher yields, it is critical to understand the dynamics of FRSBs, analyse historical returns, and assess future growth potential.
FRSBs have the potential to offer higher yields in the future. These bonds have an interest rate that is linked to the prevailing market interest rate. If market interest rates rise, the interest rate on FRSBs will also increase, potentially resulting in higher yields for investors. However, it's important to note that there is no guarantee that market interest rates will rise consistently. If market interest rates fall, the interest rate on FRSBs will also decline, which may lead to lower yields for investors.
FRSBs were introduced by the government in July 2020, initially offering an interest rate of 7.15 %. Presently, these taxable bonds provide a 7.35 %interest rate, with expectations of it rising to 8.05 percent later this year. The interest rates on FRSBs are reset semi-annually, in line with the prevailing National Saving Certificate (NSC) rate, typically with a 35 basis points (bps) spread over the NSC rate.
FRSBs have certain features and limitations that investors should be aware of:
1. Face Value and Multiples: FRSBs are issued at a face value of Rs. 1,000 and multiples thereof.
2. Coupon Payment and Interest Rate Reset: The interest rate on FRSBs is reset every six months, aligned with the coupon payment date.
3. Taxation and Exemptions: FRSBs are subject to taxation under the Income-tax Act, 1961. Tax will be deducted at source on interest payments, but exemptions are available for individuals providing a tax exemption declaration with supporting documents.
4. Non-tradability and Loan Collateral: FRSBs cannot be traded in the secondary market or used as collateral for loans.
5. Maturity and Premature Encashment: FRSBs have a maturity period of seven years. Premature encashment is allowed for investors aged 60 and above, subject to a minimum lock-in period of four to six years based on the investor's age.
FRSB rates are linked to the NSC, which, in turn, is influenced by government bond yields. As the government aims to maintain attractive rates for small savings schemes, the recent increase in interest rates for NSC and other schemes indicates their commitment. However, predicting future changes in inflation and interest rate movements remains challenging.
According to Sriram Jayaraman, a SEBI-registered Investment adviser, and Income tax planner, RBI floating rate bonds are a safe investment for individuals requiring income. He suggests that senior citizens first invest in the Senior Citizens Savings Scheme (SCSS) and then consider FRSBs once they reach the increased limit of Rs. 30 lakh.
Investors should consider the following factors when evaluating FRSBs:
1. Investment Goals: Assess whether FRSBs align with your investment goals, particularly if you seek a safe investment with a predictable income stream.
2. Risk Tolerance: Although FRSBs are relatively safe, some level of risk is involved. Evaluate your risk tolerance before investing.
3. Current Interest Rate Environment: Consider the prevailing market interest rates. FRSBs may not be favourable when rates are low, but they can be attractive when rates are high.
Floating Rate Savings Bonds (FRSBs) offer the potential for higher yields, particularly if market interest rates rise. While the decision to invest in FRSBs is complex, investors should carefully assess their investment goals, risk tolerance, and the current interest rate environment before investing in FRSBs.
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