Things to know before investing in Floating Rate Savings Bonds

Investing in financial instruments can be a great way to grow your wealth, but it's essential to understand the nuances of these options. Floating Rate Savings Bond (FRSBs) are investment avenues that have multiple benefits. Let us look at the things to know before investing in savings bonds, especially FRSBs.

What are Floating Rate Savings Bonds?

Floating Rate Savings Bonds (FRSBs) are government-issued debt securities having interest rates that are reset periodically. These bonds offer an option to invest in government-backed fixed-income securities while potentially benefiting from increasing interest rates.

Given the safety offered by FRSBs and the long maturity period, they may be one of the investment options you could look at while building your retirement portfolio.

Key features of Floating Rate Savings Bonds

Interest rate: The most significant feature of FRSBs is their floating interest rate. Typically, the interest rate is reset every six months, aligning with a specific benchmark, i.e. the prevailing National Savings Certificate rate. FRSBs offer 35 basis points higher than the rate offered by NSC. The interest rate is payable half-yearly on January 1 and July 1, every year.
Safety: Since FRSBs are issued by the government, they carry a high level of safety and low credit risk.
Tenure: These bonds usually come with a fixed tenure of seven years. However, the maturity period is lower for senior citizens. Premature withdrawal is not allowed, except for senior citizens, but with penalties.
Maximum and Minimum investment amount: The minimum investment amount allowed in FRSBs is Rs 1000, with subsequent investments in multiples of Rs 1000. There is no maximum cap on investment.

Things to know before investing in FRSBs

Interest rate risk: While the floating interest rate can be beneficial in a rising rate environment, it can also pose a risk if the benchmark rate declines.
Liquidity: FRSBs are not as liquid as some other investments. There is a lock-in period, and premature withdrawals are restricted or come with penalties. This makes them less suitable for those who might need quick access to their funds.
Taxation: Interest earned on FRSBs is taxable as per you income tax slab. This could impact the net returns, especially for those in higher tax brackets. It's crucial to consider the post-tax returns when evaluating these bonds.

Also Read: What is Savings Bond and how does it work?

Conclusion

Investing in Floating Rate Savings Bonds via Axis Bank can be beneficial for those looking to balance their portfolio with a low-risk, government-backed instrument that offers an edge against rising interest rates. However, it is crucial to understand the interest rate risk, liquidity constraints and tax implications before investing. Understanding and aligning them with your financial goals allows you to build a well-rounded investment strategy that stands the test of time. Know all about Savings Bonds and make wise investment decisions for a secure financial future.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision