RBI 7.75% Bonds no longer available: Where to invest now?

Published: May 27, 2020 at 10:08 pm

The RBI has announced the cessation of its 7.75 per cent Savings (Taxable) Bonds, 2018 with effect from the end of business day, May 28th 2020.  Where should one invest now?

First of all, it is best to try and buy them tomorrow – the last day as a huge rush should be expected. Second of all,  it is not the end of the world. As pointed out in this article – Tax-free bond vs RBI 7.75% bonds: Which is better? – the post-tax yield on RBI bonds for those in the 30% slab is only 5.33% for the cumulative option.

In addition, they were not liquid. They come with a lock-in and cannot be sold mid-term: 7 years for those less than 60; 6 years for senior citizens less than 70; 5 years for senior citizens less than 80; and 4 years for older investors.

If you are a senior citizen and wanted income from these bonds, then Senior Citizen Savings Scheme (5 years) and the PM Vaya Vandana Yojana (2020) (10 years) which is now open have the same interest rate of 7.4% which is reasonably close. Even if a new tranche of such bonds is announced, they are unlikely to be at this high rate.

If you do not need income and only growth, but scared of debt mutual fund then the only “safe” option is recurring deposits or fixed deposits at your local post office. However, the loss due to tax would be significant over the long term.

If you can overcome paranoia then for long term goals, arbitrage funds can be used as a tax-efficient (more post-tax returns than RBI bonds, liquid option. Recall that arbitrage funds are taxed as equity funds. After one year, the gain up to one lakh are tax-free (overall equity funds) and beyond that taxed at 10.4%.

A 6% return from arbitrage fund is enough (5.37% post-tax) to beat the 7.75% bonds even without factoring in the one-lakh tax-free gains. I use arbitrage funds as a debt component for my son’s future goal: Lessons from investing for my son’s future for ten years

Under certain circumstances, arbitrage funds can also be used for tax-free income. See:

Liquid fund or even overnight funds are also reasonably “safe options” that could beat the 7.75% bonds after three years. Naturally, this is not a guarantee but we cannot run away from any kind of market risk. The cost would be prohibitively high. Reasonable options with low credit-risk exist in this space for those who can look calmly.

Therefore there is nothing to fret about the closure of these bonds. There are better options.

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps