Go for Indian government’s floating rate bonds for stability and higher interest

The US Federal Reserve’s consistent interest rate hikes are triggering similar policies in India, and as a result bond prices are going down, triggering an increase in government bond yield. This may mean a short-term capital loss, but in the longer run, it’s a good opportunity to bag debt instruments at a lower rate, before the decreasing bond yield later drives up prices and returns along with it.

Investing in government securities in a growing economy such as India can be considered a safe option, since they provide higher stability. Which is why floating rate savings bonds issued by the Reserve Bank of India can be considered as a lucrative long-term investment. So here’s a breakdown of bonds and floating rate savings bonds to understand the scenario better.

How do they work?

Bonds are described as debt instruments, which represent a loan given to the issuer by the investor, for which interest will be paid on predetermined intervals and a payout will be released after the maturity date. The maturity period can range from three years to 30 years, for short, medium and long-term bonds. Bonds are used by corporations and governments to raise funds for financing an expansion or future projects. In case a company fails, bond holders have a better chance at recovering investments, since they’ll be paid back before shareholders when the assets are liquidated.

Why floating rate bonds?

Now floating rate bonds were introduced by the RBI in 2020, and Indian citizens as well as Hindu Undivided Families are eligible to invest in it. The interest is paid twice in a year, once in January and after that in July. The minimum investment for these is Rs 1000 but there’s no upper limit for how much cash one can park in them.

Floating rate means that the interest isn’t fixed and keeps fluctuating from time to time based on the market. There is no risk involved since it's a government-backed bond, and while the maturity period is seven years, senior citizens can redeem them before that. The income on these bonds is taxable, which is why people who are in the lower tax bracket should invest in them. At six per cent, a higher interest as compared to recurring and time deposits, is one more reason to buy floating rate bonds.

The bonds which aren’t tradable can be transferred to nominees, and at the same time they can be used as collateral for loans.