Is the 2020 RBI Floating Rate Savings Bond Worth Investing?

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The Reserve Bank of India (RBI) recently launched the Floating Rate Savings Bond 2020. According to the Ministry of Finance, this is a replacement for the 7.75% bond that was launched in 2018. So, in this article, we will discuss how investing in this is a good option.

However, before that, let’s learn more about the Variable Rate Savings Bond 2020. Unlike a fixed rate bond, a variable rate bond has a variable interest rate. This means that in the rising interest rate scenario the interest paid would increase and vice versa. In the case of a fixed rate bond, although the coupon rate is constant, the value of the bond would depend on the interest rate scenario. However, in the case of a floating rate bond, the bond’s spot price would be quite close to its face value, but the interest payments will change as interest rates move. Usually, these bonds are used by mutual funds (MFs) to reduce sensitivity to interest rates.

The initial coupon rate of the 2020 variable rate savings bond is 7.15%. The interest rate would be reset every six months. The first reset will take place on January 1, 2021. No cumulative option is available with these bonds. The interest rate is compared to the prevailing National Savings Certificate (NSC) rate with a deviation of 35 basis points from the NSC rate. In addition, these bonds are not negotiable and have a term of seven years. However, prepayment is only allowed for the elderly of the specified categories. Interest earned is taxable according to individual tax rates.

So who can invest in them? All Resident Indians, legal guardians on behalf of a minor and members of the Hindu Undivided Family (HUF) can invest in this bond. Unfortunately, Non-Resident Indians (NRIs) cannot invest in it.

Should we invest in them?

It is important to understand that if the interest rate drops, the issuer benefits, and if the interest rate rises, the investor benefits. In addition, the effective yield due to the possibility of a higher coupon rate would be lower in a floating rate bond.

Having said that, who should consider investing in these bonds? Anyone who needs regular income can consider investing in it. Indeed, no cumulative option is available with these bonds. Interest rates are approaching a low and are expected to rise as economic activity picks up. However, more rate cuts can be seen seven years later. Therefore, these cannot be characterized as a good source of regular income.


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