RBI’s FRSB: A safe bet for investors

Floating Rate Boinds

While seven years is a long time for assuming the rate of interest on the FRSB bonds, the good part of them is that they’re pegged to the National Savings Certificate. These small savings schemes always have decent and preferably higher interest rates than the other

Finding fixed returns on our investments is always an exciting proposition. And if the returns are higher and guaranteed, then merrier, for which we tend to explore various options. Guarantee in financial instruments also come with strings attached. Period. Either the interest is taxed or investment is locked. With recent memories of inflation ravaging the investors, particularly those in the fixed income or debt investment, would love to find better alternatives to the existing avenues.

As the pandemic set in and governments across the world imposed the lockdowns has resulted in stalled economies. To revive growth, central banks have reduced interest rates. While this helped initiate the growth, it has impaired the savers the most. The onset of inflation and in a fight to counter, the central banks have increased the interest rates, brought cheer though it has dented the real returns. Now that the inflation began to cool across, the real return has spiked compared to a few quarters auguring well for the fixed income space.

Reserve Bank of India (RBI), the banking regulator in India has come up with RBI Floating Rate Savings Bonds 2020 (taxable), FRSB which currently offer 8.05 per cent interest on the principal invested. These bonds are sovereign guaranteed on both principal and interest, so highly secure. These bonds have a lock-in till maturity for a period of seven years. Only resident Indians are allowed to invest in these bonds with a minimum investment of Rs 1,000 and in multiple of 1,000 thereafter with no maximum limit.

The interest rate, while guaranteed, is payable semi-annually, ie, twice in a year from the date of issuance up to 30th June or 31st December each year. The interest to be paid for the next six month is decided on next date ie, on 1st July and 1st January respectively. The coupon or interest will be reset half yearly peggedto the National Savings Certificate (NSC) rate (as base rate) plus 35 bps (basis points). For instance, if the current rate of NSC bond is 7.7 per cent then the FRSB coupon would be at 8.05 per cent.

The bond is expired or has a maturity of seven years and is not listed which means it can’t be traded or transferrable. They aren’t eligible for as a collateral so can’t avail any loan against these bonds. However, premature redemption is allowed for specified categories of senior citizens. This facility is available for investors eligible after 4, 5 and 6 years in the age bracket of 80 years & above, 70-80 years and 60-70 years respectively. A penalty of 50 per cent of the last coupon payment is levied at the time of premature redemption.

The interest earned on these bonds are taxable and tax will be deducted at the source when interest is paid. Any other applicable exemptions could be declared at the time of investment. Though non-transferrable, as nomination is mandated, transferability is limited to nominee(s) or legal heir in case of the death of the bondholder. These bonds could be invested either physical or online through the Retail Direct Portal of the RBI and any of the commercial banks.

While seven years is a long time for assuming the rate of interest on these bonds, the good part of them is that they’re pegged to the NSC. These small savings schemes always have decent and preferably higher interest rates than the other. The premium of 35 bps ie, 0.35 per cent over this rate could be at one of the highest guaranteed rates if not the highest at any of the period. For historical comparison, the NSC bonds had the highest rate at 8.5 per cent and 6.8 per cent at the lowest in the last ten years.

Investors with lower tax bracket and risk-averse could use these bonds as part of their fixed income portfolio. Particularly, to those investors looking for regular money as there is no cumulative option available with these bonds. This is an additional option to those senior citizen individuals who have exhausted the Senior Citizen Savings Scheme (SCSS), Post Office Monthly Investment Scheme (POMIS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY).

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])