RBI - Floating Rate Bonds Compare

Additional Useful Information

• When an investor purchases a Floating Rate Bond, the issuing institution is bound by a legal contract wherein they are obligated to make interest payments as per the coupon rate to the investor.

• Floating Rate Bonds are not tradeable in the secondary market. This means that investors must hold these bonds to maturity and cannot sell them before maturity to any other investor.

• Investing in Floating Rate Bonds is suitable for investors who desire regular passive income.

Returns *

• Floating Rate Bonds can guarantee return for the investors in the form interest payments. These payments are in line with the pre-defined interest rates specified in the bond terms and conditions i.e., the Coupon Rate.

• Typically, Floating Rate Bonds can generate returns ranging from 6% to 8% per year, or more (less) if the benchmark rate increases (decreases).

• Floating Rate Bonds usually provide higher returns as compared to bank fixed deposits.

Risk Level

• Floating Rate Bonds are considered low risk investments. They are riskier as compared to fixed deposits.

• Floating Rate Bonds have a credit risk associated with them. This means that if the institution issuing these bonds default in their commitments, the investor can make losses on the investment. Since the institution issuing these bonds is the RBI, the credit risk is negligible.

• Floating Rate Bonds become riskier during times of economic downturn. This is because the chance of the issuing institution defaulting on the interest payments are higher in these times.

• Based on the credit risk, all bonds are provided with a credit rating by a credit rating agency. This helps in determining how safe or risky the bonds are. Investors should analyse this rating to understand the risk more accurately.

Liquidity

• Floating Rate Bonds are illiquid.

• They are not tradeable or transferable, which means they cannot be sold.

• Floating Rate Bonds have a lock in period. This depends on the age of the investors.

• If an investor is 60 years old or above, the lock in period is smaller, and premature redemption is available.

• If an investor is below 60 years old, they have to hold the investment until it matures.

Interesting Facts

• This investment is considered risk free since it is issued by the Reserve Bank of India. 

• The interest rate paid on floating rate bonds is often based on a benchmark index. For these floating rate bonds, the NSC (National Savings Certificate) benchmark is used.

• Floating rate bonds offer greater protection against interest rate risk compared to fixed rate bonds.

• A minimum of ₹1000 can be invested in these floating rate bonds. There is no upper limit to what investors can invest.

Tax Implications

• Earnings received from Floating Rate Bonds are taxable.

• Interest earned by investors from Floating Rate Bonds are to be added to their total taxable income and taxes are required to be paid as per the income tax slab.

• Since these bonds are not tradeable, capital gains taxes are not applicable since there are no gains due to any trading.

Where To Invest

• Buy RBI Floating Rate Savings Bonds Online in India | ICICI Direct

• https://scripbox.com/pf/floating-rate-bonds/