Are RBI Bonds better than Fixed Deposits?

Written on Wednesday, January 24, 2018
By Shikha Bhatnagar- Executive Vice President, Private Banking, Bajaj Capital

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In Falling, Interest Rates Scenario RBI Bonds are Blessings in Disguise

In the scenario of falling interest rates of fixed income schemes like Fixed Deposits offered by Banks, RBI Bonds are not just a better option but it is a blessing in disguise. It is one of the best deals for investors, who are looking to invest a lump sum and earn 7.75%  returns i.e. 1-2% higher than Bank deposits schemes.

These Bonds are issued by RBI (Reserve Bank of India) with interest rate of 7.75%(compounded/payable half-yearly). Individuals (single, joint or minor) and HUFs can invest in these Bonds, however, NRI's are not eligible to invest. 

Face Value of Bond is Rs 1,000 and the minimum investment is 1 bond (Rs. 1000). Apart from many other benefits one of the benefits of RBI Bonds is that there is no maximum limit on Investment, which makes them suitable for lump sum investments. Bond tenure is 7 years. 
Options to choose: 
1) Cumulative – You receive Rs 1,703 at the end of 7 years on maturity for every Rs 1,000 invested. 
2) Non-cumulative – Interest paid on August 1 and February 1 every year. 
Why should you Invest? 
1) 7.75% interest is higher than most banks are offering today. 
2) As the bonds are issued by RBI and are sovereign rated, there is NO credit risk and are fully safe. 
3) It offers nomination facility as well. 
Best suited for Senior Citizens: 
1) Lock in period for investors in the age bracket of 60 to 70 years shall be 6 years from the date of issue. 
2) Lock in period for investors in the age bracket of 70 to 80 years shall be 5 years from the date of issue. 
3) Lock in period for investors of the age of 80 years and above shall be 4 years from the date of issue. 
In case of joint holders or more than two holders of the Bond, the above lock-in period will be applicable even if any one of the holders fulfills the above conditions of eligibility. In case one wish to do a premature surrender, 50% of the interest due and payable for the last six months of the holding period will be recovered as a penalty from the investor. Partial withdrawal is not permitted in this case which makes them suitable for long-term investing beating Indian's tendency of using their investments for impulsive buying. 
Investors looking for better and fixed returns for investing lumpsum amount should invest in Bonds offered by RBI. It offers zero credit risk which makes them suitable for senior citizens. 


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