In a recent talk, a person nearing retirement asked me to explain the differences between RBI Retail Direct Bonds and RBI Floating Rate Bonds.
RBI Floating Rate Bonds have a seven-year duration and a variable interest rate reset every six months. Its return is fixed at the prevailing NSC rate plus 0.35%. It provides interest payouts every six months.
Although there is a risk of lower interest rates during the investment tenure and upon reinvestment, it is an excellent choice for retirees with a limited corpus. It can be obtained via your bank. Most banks may offer this in their online banking portal.
RBI Retail Direct is not a bond but a bond portal. You can create an account online and buy short-term and long-term government of India bonds and state government bonds.
We have discussed this portal in detail before.
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The trouble is, although it is intended for the retail investor, it is not easy to understand for the layman. They must have some basic knowledge of how bonds work: tenure, coupon rate and effective yield.
Although it is not rocket science, it is quite easy to make a mistake, and most retirees cannot afford to make one.
While RBI Floating Rate Bonds have a fixed 7Y tenure, you can find bonds with tenures ranging from weeks to 50 years!!
The long-term option will not always be available, and even if available, it could be at an unattractive interest rate.
I would recommend savvy investors with a good corpus to consider the RBI Retail Direct Option. As these bonds are long-term and cannot be sold freely in the secondary market, they should be purchased only if the retiree is sure that they will not need the money mid-tenure.
RBI floating-rate bonds are suitable for retirees with a guaranteed pension and a limited corpus. They could allocate part of the money here, along with schemes like the Senior Citizen Savings Scheme, etc.
Depending on interest rate cycles, RBI Retail Direct Long Term Bonds are a good option for affluent retirees (in their 50s and early 60s) looking for a better alternative to annuity policies issued by life insurers. As the retiree ages, annuities may offer better returns. I need a pension: Should I buy an annuity or a government bond?
Both types of bonds can be held jointly. The long term bonds do not need proof of life certification like annuity policies, and the principal will always be returned to the nominees. Such a return-of-principal option should be selected in annuities, and they will come with lower interest rates!