Government Launches Floating-rate Bonds: Should You Buy?

Government time to time launches various investment schemes when it needs to raise funds to support its various development projects. Government borrowing is commonplace. Similarly, the government of India also floats various savings schemes for resident Indians whenever it needs to borrow money from the public. Several investors prefer investing in these bonds as these are sovereign in nature, and therefore, deemed safe. If you are looking for alternatives to diversify your portfolio, government bonds are good choices.

In June, the government announced that it has plans to launch a new floating-rate savings bonds (FRS) in place of the previous 7.75 percent fixed-rate bonds. In May, the 7.75 percent fixed-rate taxable bond got discontinued and replaced with the new floating-rate savings bonds 2020. The 7.15 percent floating-rate bonds become available for subscription from July 2020.

What are floating-rate savings bonds?

The floating-rate bonds are debt instruments. As the name suggests, interest rate on these bonds fluctuate and adjust to the prevailing market interest rate. In the case of floating-rate savings bonds 2020, it is the National Savings Certificate (NSC) interest rate at that time. That is for a bond issued in July, the interest rate will adjust in January 2021, and every six months thereafter.  There is no option to receive the payment on a cumulative basis upon maturity. Earlier investors had the opportunity to receive cumulative value on the fixed-rate savings bonds at the end of the tenure.

Features of the new floating-rate savings bonds 2020

RBI is a press release highlighted the following salient features of the new floating-rate savings bonds 2020.

• These bonds are available for subscription to resident individuals (including joint holding) and HUF. NRIs don’t qualify for the scheme
• Guardians of minor children can also apply on behalf of the minor
• The minimum amount you can invest is Rs 1,000, and there is no ceiling for the upper value, meaning you can invest as much as you want at the multiple of 1000
• You can redeem your bonds upon maturity after seven years from the date of issuance. Premature redemption is allowed on special occasions to senior citizens
• These bonds are not available for trading in the secondary market. So, the only option you have is to redeem the bonds on maturity
• The lock-in period for investors 80 years and above is four years. If you belong to the age group of 70-80 years, the lock-in period increases to five years.

The interest on the floating-rate savings bonds is payable every six months. That is, investors who have bought the bonds in July 2020 will become eligible to receive their first interest instalment in January 2021 for an initial interest rate of 7.15 percent. The interest rate will modify every six months afterward. Unlike the fixed interest rate bonds, there is no provision to receive cumulative value upon maturity after seven years.  The interest is also taxable as per income tax slab applicable to your income. Interest earning from these bonds is also subject to TDS deduction.

Who can apply for these bonds?

You can apply for these bonds if you are a resident Indian. These bonds aren’t open to Indians living abroad. If you harbour conservative outlook towards investment, these floating-rate savings bonds 2020 are low-risk options with an assured nature of the return. Moreover, senior citizens and individuals who aren’t falling in the IT bracket or exempted from income tax can get the benefit of a steady return on investment. Since these bonds are sovereign in nature, they carry GOI guarantee on return.

Should you invest?

Government bonds are good options to add to your portfolio to reduce risk exposure. These bonds carry less credit risk and are backed by the government. In a time when investors are looking for safe investment avenues, floating-rate savings bonds 2020 give them a choice to park their money away from market volatility.

These bonds will cater to a certain group of investors who want a somewhat assured return on investment and, at the same time, want to enjoy a higher rate of return.  On the flipside, FRS bonds will offer zero liquidity. These can’t be traded in the secondary market or used as collateral to avail loans.  Floating rates also mean that in the future, interest income can also reduce.

Remember, the interest income on the bonds is taxable as per your income tax slab. If you are looking for tax saving bonds, invest in the tax-free bonds from the public sector undertakings instead.