Floating Rate Bonds in India

Floating Rate Bonds in India

Feb 28, 2024

Feb 28, 2024

Investors seek instruments that adapt to market dynamics in the ever-evolving finance landscape. Enter Floating Rate Bonds, a flexible option designed to weather the storm of changing interest rates. In this comprehensive guide, we'll explore the ins and outs of Floating Rate Bonds, uncovering their features, risks, and the potential advantages they bring to savvy investors.

Understanding Floating Rate Bonds:

What Are Floating Rate Bonds?

Floating Rate Bonds, a dynamic alternative to fixed-rate bonds, boast variable interest rates linked to benchmarks like LIBOR or the prime rate. This adaptability shields investors from inflation and interest rate fluctuations.

How Do Floating Rate Bonds Work?

The interest rate of floating rate bonds adjusts periodically and is tied to a benchmark. This flexibility positions investors for higher returns, especially in environments of rising interest rates.

Advantages and Disadvantages:

Advantages:

1. Lower Volatility: Prices are less susceptible to market changes than fixed-rate bonds.

2. High Returns: Potential for increased returns, particularly in rising interest rate scenarios.

3. Safety: Often issued by government bodies, mitigating default risk.

4. Diversification: Balances portfolio risk, especially in inverse market conditions.

Disadvantages:

1. Lower Yield: May offer lower yields than fixed-rate bonds, especially in falling interest rate environments.

2. Interest Rate Risk: Potential lag in adjusting to market rate changes.

3. Credit Risk: While lower, investors should monitor the creditworthiness of issuers.

Rising and Falling Interest Rates:

Effect of Rising Interest Rates:

Floating Rate Bonds yield higher returns as they adjust with rising benchmark rates, providing a hedge against inflation and increased borrowing costs.

Effect of Falling Interest Rates:

Yields may decrease if the benchmark rate falls, potentially lagging behind fixed-rate bonds. Investors should consider the market environment when making investment decisions.

Common Questions About Floating Rate Bonds:

Who Invests in Floating Rate Bonds?

Appealing to investors seeking protection against rising interest rates, they attract pension funds, asset managers, and income-focused investors.

How Do I Compare Different Floating Rate Bonds?

Consider credit rating spread over the benchmark rate, call features, liquidity, an the benchmark used.

Where Can I Buy Floating Rate Bonds?

Traded on the secondary market through brokers and financial institutions, with some mutual funds and ETFs offering exposure.

Tax Implications:

The interest income earned from floating-rate bonds is generally treated as taxable income.

It is added to your total income and is typically taxable as ordinary income. Unlike certain tax-saving instruments, Floating Rate Bonds usually don't offer specific deductions. Indexation adjusts the asset's purchase price for inflation, potentially reducing the taxable capital gains. Consult with a tax advisor for specific details.

Impact on Portfolio:

Consider the volatility and risk profile when diversifying your portfolio. While they manage interest rate risk, their performance may vary in different market conditions.

Market Insights:

Issuance of floating rate bonds has grown over 50% between 2018 and 2023, driven by rising interest rate expectations and increased demand for income-generating assets.

Yield Comparison (As of February 5, 2024):

- The average yield of investment-grade US floating-rate bonds is around 4.5%.

- The average yield of investment-grade US fixed-rate bonds with similar maturities is around 4.2%.

In conclusion, Floating Rate Bonds offer a dynamic income generation approach with advantages and considerations. As with any investment, careful evaluation, market awareness, and professional advice are essential for making informed decisions in this ever-changing financial landscape.


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The Company is an intermediary platform facilitating transactions in financial products. The information comprised herein is merely for information purposes and are subject to verification by investors. Investors are advised to refer and read carefully the offer documents.

© 2023 Purple Petal Invest Private Limited

Get started with as low as ₹50,000.

Get started today

The Company is an intermediary platform facilitating transactions in financial products. The information comprised herein is merely for information purposes and are subject to verification by investors. Investors are advised to refer and read carefully the offer documents.

© 2023 Purple Petal Invest Private Limited