A phone call between two friends leads to a conversation about the interest rates offered by various debt options and whether they stay fixed or vary during the tenure of the instrument.

Karthik : Hey, have you noticed that in the last couple of months the markets have rallied like there is no tomorrow?

Akhila : Oh, yeah. And after much thinking, I finally booked profits on some of my equity holdings last week.

Karthik : Where are you planning to park these funds now?

Akhila : I would like to invest them for the long-term in Public Provident Fund (PPF), a post office savings scheme.

Karthik : That’s a good option.

Akhila : But I am concerned that my investment will get locked in at the current interest rate. I have been reading that interest rates in the economy may inch up going ahead.

Karthik : Don’t worry. The interest payable on PPF is revised by the Central government every quarter.

Akhila : Oh! So the interest rate offered on my PPF investment changes every quarter?

Karthik : Yes. Interest on your entire PPF corpus is calculated each quarter based on the latest quarterly rate. This interest gets credited to the account at the end of each financial year and compounds annually.

Akhila : What are the other small savings schemes for which interest offered is not fixed? I mean, the schemes where the investment amount is not locked in at the rate applicable on the date of investment?

Karthik : The interest rate on Sukanya Samriddhi Yojana (SSY) also resets quarterly, and the new rate announced each quarter applies to the accumulated corpus.

Akhila : What are these interest rates based on?

Karthik : The interest rates on PPF and SSY are supposed to be 0.25 per cent and 0.75 per cent, respectively, over the average G-Sec yield in the previous year.

Akhila : Is it? Looks like the current interest rates on these schemes are higher than what they should have been as per the formula.

Karthik : Yeah, the government has been putting off cutting the interest rates on small savings schemes.

Akhila : Phew! Anyways, tell me are they any other floating rate savings instruments?

Karthik : The Floating Rate Savings Bonds (FRSBs) 2020 issued by the RBI and backed by the government is another such instrument. The interest rate on this bond (now 7.15%) is set at a 35 basis points spread over the prevailing NSC (National Savings Certificate) rate and is reset half-yearly. There are floating rate debt funds as well which invest in a mix of floating-rate debt instruments and fixed-rate debt papers converted into floating-rate ones using interest-rate swaps.

Akhila : Got it. Thank you.

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