Planning to invest in FRSBs? Read on to know more about them

Floating rate savings bonds (FRSBs) are primarily debt instruments issued by the government, and offer a floating rate of interest to the bond holders. These bonds were launched and became available for subscription from 1 July 2020. 

Amidst the pandemic, interest rates globally have dropped to an all-time low. Hence, fresh fund-raising by any institution at fixed interest rates (i.e. lower levels) might not seem to be very lucrative for the bond investors. Hence, the government decided to launch floating rate bonds to offer better incentives to investors. 

Key features of FRSBs

• Tenure of bond: The tenure of floating rate savings bonds is 7 years. In other words, the lock-in period for FRSB investors would be 7 years. However, senior citizens above 60 have the option of early redemption, subject to certain conditions. 
   
• Rate of interest: The interest rate of FRSB is pegged to the prevailing National Savings Certificate (NSC) interest rate. The rate is fixed as the pegged rate plus 35 basis points i.e. 0.35%. If the NSC interest rate is 7%, the FRSB rate would be 7.35%.
   
• Frequency of interest rate payment: The interest on FRSB shall be paid every 6 months and the interest rate will be reset as per the latest market interest rates. This is one of the most important features of floating interest rate bonds, where the investor’s return is subject to market risks.
   
• Taxability: Interest received on the bonds shall be taxable as per one’s prevailing income tax slab. These are different from the usual tax-saving bonds.
   
• Ease of doing business: Investors can purchase FRSBs in dematerialised form in bond ledger accounts. The demat form offers great comfort in holding the securities without any cumbersome physical documents. 

Related: Top 7 fixed-income investments in India

Advantages of FRSBs

• Zero credit risk: The bonds are issued by the RBI and therefore come with zero credit risk. Sovereign bonds issued by the government of India are generally without any credit risk. And these are government bonds.
   
• Higher return: With the recent crash in the global interest rates, many banks have lowered their interest rates on banking products like fixed deposits. Also, these banks are companies (not government entities), so they carry some level of credit risk. In comparison to fixed deposits, FRSBs offer a much higher interest rate with minimal or no credit risk. Therefore, it has a much better risk-to-reward ratio.
   
• No fixed return: This could be considered a disadvantage by investors who seek a fixed return investment. However, given the current market scenario, the interest rates are trading at their lowest rates globally (close to zero in the US). So there is little chance for the interest rate to sink any further. As the interest rate structure is a floating rate model for FRSB, any increase in interest rates will only mean better returns for the investor.

Related: Choosing between fixed-income and market-linked investment avenues

Disadvantages of FRSBs

• Taxability: The half-yearly interest payment received by the investor is taxable as per the normal slab rate. 
   
• Illiquid investment: Although these bonds are to be held in demat form, these are non-transferable and non-saleable. There is a fixed lock-in period of 7 years for all investors (except senior citizens, who can redeem it earlier subject to certain conditions).
   
• No fixed return: As mentioned earlier, the returns are linked to floating interest rates, so investors having a limited risk appetite and expectations of a fixed return might not prefer FRSBs. 

Related: Floating rate savings bonds: What makes them attractive for senior citizens?

Does it make sense to buy these bonds?

Only resident individuals can invest in FRSBs. NRIs or foreign nationals are not eligible.

As we saw, these bonds are taxable as per the normal slab rates. If a person is already in the 30 percent tax bracket (based on their primary source of income) it makes little sense to invest in these bonds. The interest rate on bonds will be affected by 30 percent and the net after-tax return will be much lower. 

However, it is logical for investors who are in a lower tax bracket to participate in these bonds as they will yield higher post-tax returns. The bonds need to be compared with other liquid funds and fixed deposits on a post-tax returns basis. The income tax slab of the individual should be a key factor while deciding to invest in these bonds.

Further, the bonds have a significant lock-in period of 7 years. There is no procedure for early redemption except for senior citizens. The investor will have to evaluate these bonds from a long-term perspective and compare with other bonds and investment options available in the same time frame. After all, these are long-term investments. 7 Investment plans for senior citizens that offer high interest rates.