Indians still prefer cash despite rising digital payments

Representative image (Pixabay)

Worried about low fixed deposit rates? Looking for fixed income options to park your money?

Here are a few options where you can invest to earn interest rates higher than bank fixed deposits.

Floating Rate Bonds

Unlike regular bonds that pay fixed interest rate, Floating Rate Savings Bonds, 2020, have a variable rate of interest. These bonds are issued by the government of India and are considered safe. The rate for first coupon period is fixed at 7.15%. It comes with a lock-in period of seven years with a special provision for premature redemption for senior citizens.

The rate of interest of a floating rate bond is linked to a benchmark rate, which is reset at a regular interval. The benchmark is the prevailing National Saving Certificate (NSC) rate with a spread of (+) 35 bps.

The interest on these bonds is payable at half yearly intervals on January 1 and July 1 every year. They do not pay interest on cumulative basis. In addition, there is no upper investment limit on these bonds.

“These bonds were earlier known as RBI bonds and used to offer fixed rate of 7.75%. When interest rates started decreasing after the pandemic the government decided to launch floating rate bonds, said Anil Chopra, Group Director – Financial Wellbeing, Bajaj Capital.

Company Deposits

Corporate FDs are similar to bank FDs. Bank FDs are offered by banks whereas corporate FDs are offered by companies. It is one of the ways by which companies, mostly NBFCs, raise money from the market to meet their business needs. In return, companies offer interest rate on deposits at a prescribed interest rate for different tenures ranging from one to seven years. One of the benefits of corporate FDs is that they provide higher interest rates than bank FDs. Considering risks involved in the business they pay higher interest rate to attract investors.

“The investor should understand that they give higher returns only because they are risky. Investors should invest in AAA-rated corporate FDs only. Do not look for lower-rated FDs to get higher returns,” said Kalpesh Ashar, a certified financial planner.

Non-convertible debentures

NCDs offer higher interest rates and are similar to company fixed deposits. As the name suggests, it cannot be converted into equity shares at the time of maturity.

Investors go in for FDs mostly because of higher liquidity. NCDs, on the other hand, are listed on the BSE and NSE Before you go for it, remember there are two types of NCDs – secured and unsecured. At the time of  liquidation secured NCDs are preferred over unsecured NCDs. Because of higher risks, unsecured NCDs offer a higher rate of interest than secured ones.

These bonds are tradeable on exchanges but are low on liquidity score. Moreover, interest income on NCDs is just like bank deposits. However, if they are sold within one year then the capital gain is chargeable to tax. For NCDs sold after a year of allotment long-term capital gain is levied. Short term capital gain is taxed according to your tax slab. While long term capital gain is taxed at 20% with benefits of indexation.

When interest rates are low, the above mentioned alternatives can help you sail through choppy waters and earn more interest on your savings.