Should I invest in the Floating Rate Savings Bond, 2020?

By Morningstar |  16-07-20 | 

At a time where there is so much uncertainty, the thought of investing a huge amount in these bonds, and being assured of a return is enticing. The minimum investment is Rs 1,000 and multiples of it. There is no upper limit.

Since the interest earned is taxable as per individual tax slab rates, it would be a good investment if you do not fall in the highest tax bracket. So if you do not pay income tax or fall in the lowest tax bracket, consider it.

If you could do with regular pay-outs, then this would help. This bond has no cumulative option, so there is no lump-sum maturity, you get the interest paid into your account twice a year. This will be done on January 1 and July 1.

But since it is a floating rate bond, the returns will change. If interest rates drop, so shall these returns. So account for this unpredictability in cash flows.

Also, ensure that you do not need the principal amount. The lock-in period is 7 years, and the bonds are not tradable. So it is not a liquid instrument. (Premature redemption is certain cases for senior citizens).

Here are some facts about the bonds.

The coupon rate, or CR, is periodically reset.

A bond's CR is the amount of annual interest paid by the issuer to the investor. It is set when the bond is issued.

When it is a floating rate bond, it means that the CR is periodically adjusted to market rates. This adjustment takes place periodically – quarterly, semi-annually or annually.

The initial coupon rate is 7.15%. The interest rate reset shall happen every 6 months, so the first reset will be on January 1, 2021.

The interest rate is assured.

Since the bonds are issued by the Reserve Bank of India, you are assured of the safety of principal and timely payment of interest.

But, the rate fluctuates. Unlike a fixed-rate bond, a floating rate bond has a variable interest rate. This means that in a falling interest rate scenario, the interest paid out would decrease and vice-versa.

The interest rate is benchmarked against the prevailing rate of National Saving Certificate (NSC) with a spread of 35 basis points over the NSC rate (100bps = 1%).

Once again, the interest rate is taxed.

Any one can invest in these bonds.

  • Resident Indian citizens
  • Senior citizens
  • Legal guardians can invest on behalf of a minor
  • Hindu Undivided Family, or HUF

Non-resident Indians, or NRIs, are excluded.

Joint holdings are permitted. Sole holders can nominate.

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