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What are Floating Rate Bonds?
When you invest in long-term, low-risk investments, you often worry about locking your funds for a lower interest rate. However, with Floating Rate Bonds, you can safeguard your capital while enjoying returns that adjust with interest rate changes.
What is a Floating Rate Bond?
Floating Rate Bonds are RBI-issued bonds with a dynamic interest rate which changes every six months. The interest rate is 0.35% higher than the current interest rate on National Savings Certificates. These bonds have a lock-in period of seven years. The minimum investment amount is ₹1,000, and you can invest in multiples of ₹1,000.
How do Floating Rate Bonds work?
The Reserve Bank of India periodically issues Floating Rate Bonds. You can invest in them online or offline through your bank. The new interest rate is announced every July and January. The interest income on these bonds would be taxed as per your regular tax slabs. Once you invest, there is no premature withdrawal option. Only senior citizens can withdraw their money after a specified period. You will receive your principal amount upon the maturity of the bonds.
Different classifications of a Floating Rate Bond
- Callable Floating Rate Bonds: The issuer can repay the bonds before maturity. This option is called a call option, and it increases the risk associated with Floating Rate Bonds.
- Non-Callable Floating Rate Bonds: The issuer of such Floating Rate Bonds cannot repay them before the pre-determined maturity. You will hold the bond until it matures, providing more stability than callable bonds.
Advantages of Floating Rate Bonds
- Less volatility: Since the interest on Floating Rate Bonds changes with the market, the price fluctuations are lower than fixed-rate bonds and hence, more predictable.
- Higher returns: When interest rates rise, the bond's return increases, potentially offering higher returns for you.
- Safe investments: Since the Reserve Bank of India issues Floating Rate Bonds, they are accompanied by very low risk.
- Diversification: Investing in Floating Rate Bonds helps spread investment risk by adding a different type of asset to your portfolio.
Disadvantages of Floating Rate Bonds
- Lower yield: Compared to a fixed-rate bond with similar maturity, a Floating Rate Bond may have a lower yield.
- Interest rate risk: While their rates adjust, if market rates fall, the bond's returns are likely to drop accordingly.
- Call risk: If interest rates drop, the issuer may call the bond early, limiting your potential returns.
Also Read: What is SGB: Meaning, features & benefits
Conclusion
Floating Rate Bonds provide an attractive investment option due to their adaptable returns and relatively low-risk profile. These bonds are particularly well-suited if you prefer a cautious approach and aim to preserve capital while still earning a decent return. A key feature of Floating Rate Bonds is that their interest rates adjust periodically based on prevailing market conditions, offering flexibility and the potential for higher earnings when interest rates rise. Additionally, the support and backing of the Reserve Bank of India (RBI) enhance their reliability and safety, making them an appealing choice for you.
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.
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