RBI Floating Rate Bonds vs Bank FDs vs Target-Maturity Debt ETFs: Which One Should You Pick?

When it comes to investing in India, fixed-income options like Bank Fixed Deposits (FDs), RBI Floating Rate Savings Bonds, and Target-Maturity Debt ETFs are often on every investor’s radar. But choosing the right one can be tricky. Each comes with its own set of advantages, drawbacks, and risk profiles. Let’s break them down in simple terms so you can make a decision that suits your financial goals. 

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Bank Fixed Deposits (FDs) – The Traditional Safe Haven 

Bank FDs are probably the most familiar investment for many of us. You deposit a sum with a bank for a fixed tenure, and in return, the bank promises you a set interest rate. At the end of the term, you get your principal plus interest. 

What makes FDs appeal to is their safety. Deposits up to ₹5 lakh per bank are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). So, even if the bank faces trouble, your money is largely protected. 

Interest rates for FDs usually hover around 6% to 7% per annum, depending on the bank and the tenure. They are easy to understand, but their returns may struggle to keep up with inflation over time. Premature withdrawals are possible, but there’s usually a penalty. Another factor to keep in mind is taxation—interest earned is fully taxable, and TDS applies if your annual interest exceeds ₹10,000. 

In short, FDs are perfect if you prioritise safety and guaranteed returns, but they aren’t always the best if beating inflation or earning slightly higher returns is your goal. 

RBI Floating Rate Bonds – A Smarter Government-Backed Option 

RBI Floating Rate Savings Bonds (FRSBs) are government-backed bonds with a twist—they offer a floating interest rate, which changes every six months. Currently, the rate is 8.05% per annum for the July–December 2025 period. 

The key attraction here is safety—these are sovereign-backed, meaning credit risk is minimal. Interest rates are linked to the National Savings Certificate (NSC) rate plus a small spread, making them competitive in the fixed-income space. 

That said, they come up with a seven-year lock-in period, which might not suit everyone. Interest is paid every six months, and like FDs, it is taxable, with TDS applying over ₹10,000 per year. 

FRSBs are ideal if you want a reliable government-backed option with slightly better returns than most FDs and are comfortable locking your money in for the long term. 

Target-Maturity Debt ETFs – Flexible, Market-Linked Returns 

Target-Maturity Debt ETFs are a newer addition to the Indian investment landscape. These ETFs invest in bonds that have a predetermined maturity date, such as government securities, state development loans, or bonds from public sector undertakings. 

The key advantage is liquidity. Since they’re traded on stock exchanges, you can buy or sell them on any trading day. They also have the potential to give higher returns than traditional FDs or even RBI bonds, averaging around 8.25% per annum. 

However, unlike FDs or government bonds, these ETFs are market-linked, so returns are not guaranteed and can fluctuate with interest rates and bond prices. Taxation is slightly different too—capital gains tax applies, with short-term gains taxed at 15% and long-term gains at 10% without indexation or 20% with indexation. 

Target-Maturity Debt ETFs suit investors who want a balance of safety and potential returns, are comfortable with market risks, and prefer the flexibility to exit when needed. 

How to Decide? 

If you’re a conservative investor who prioritises safety, Bank FDs or RBI Floating Rate Bonds are excellent choices. FDs are flexible for short-term needs, while RBI bonds offer slightly higher returns for long-term planning. 

If your goal is to earn better returns while still keeping risk moderate, Target-Maturity Debt ETFs are worth considering. They allow you to tap into market-linked growth without taking excessive risk, and the flexibility to trade makes them attractive. 

For those thinking about tax efficiency, ETFs could offer an edge due to favourable long-term capital gains treatment. 

Final Thoughts 

Each option—Bank FDs, RBI Floating Rate Bonds, and Target-Maturity Debt ETFs—has its own charm and fits different financial goals. The right choice depends on your risk appetite, investment horizon, and return expectations. A mix of these instruments can also be a smart approach to balance safety, growth, and liquidity. 

Always consider speaking to a financial advisor before making any major investment decisions. After all, it’s not just about where you invest—it’s about how well the investment aligns with your goals and life plans.