What are the inflation-beating fixed income options available?

Bank FDs are typically considered the safest investment avenue to park your funds. The interest rates are better than a savings account and hence, people with low-risk appetite usually prefer investing in them.

But fixed deposits often fail to overcome inflation and when tax is deducted, the final returns may plunge below the rate of inflation. So, what are other inflation-beating fixed income products available right now?

Amit Kukreja, founder, Amitkukreja.com, told Money9 that people can opt for a zero default product called RBI Floating Rate Bonds.

“As these bonds are issued by the government, they are considered safe. The rate for the first coupon period is fixed at 7.15%. If you are in the 30% tax bracket, you will get 70% of 7.15% as a post-tax return, which could match inflation,” he said.

He further added that for people with a higher risk appetite, corporate bonds or short term debt funds with AAA-rated papers can be a good option as debt funds are tax-efficient if the holding period is more than three years.

What are Floating Rate Bonds?

Floating Rate Bonds give higher interest rates than bank FDs and unlike regular bonds, they pay fixed interest rates. It comes with a lock-in period of seven years with a special provision for premature redemption for senior citizens. There is no upper investment limit.

The rate for the first coupon period is fixed at 7.15%. The interest on these bonds is payable at half-yearly intervals on January 1 and July 1 every year.

“These bonds were earlier known as RBI bonds and used to offer a 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.

What are Corporate FDs?

Unlike bank FDs, Corporate FDs are offered by companies. They provide higher interest rates than bank FDs as they are considered a risky investment option. 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 an interest rate on deposits at a prescribed interest rate for different tenures ranging from one to seven years.

“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.