Earlier this week, the Reserve Bank of India unveiled a scheme allowing retail investors to directly participate in the government securities market. They can open and maintain a ‘Retail Direct Gilt Account’ (RDG Account) with the RBI through a portal, which will also provide access to primary issuance of G-Secs and the secondary market as well. In February, the RBI had proposed retail access to this risk-free fixed income segment.
Greater participation will support the government’s expanding borrowings plan, estimated at around Rs 12 lakh crore annually. It may also pose competition to bank fixed deposits and post office savings.
These are debt instruments, issued by the government. They are considered the safest form of investment; the government will not default as it has the option to raise funds through taxes and other means if it faces challenges in repayment. Retail investors have been allowed to buy and sell treasury bills, government bonds, sovereign gold bonds as well as State Development Loans.
Currently, retail investors are allowed to submit non-competitive bids in auctions of government bonds. They could access the NDS-OM (Negotiated Dealing System-Order Matching) through stock exchanges, which would aggregate the demand for gilts and place it to RBI in NDS-OM.
Now, a retail investor can open a gilt account with the RBI and place a direct bid on NDS-OM as well as trade in the secondary market. So far, only institutional players like banks, primary dealers, insurance companies, mutual funds, foreign portfolio investors and high net worth individuals had direct access to this platform. Gilts are normally traded on NDS-OM in lots of Rs 5 crore each, but retail investors have been allowed to trade with a minimum investment of Rs 10,000.
To register online, investors need to have a rupee savings bank account in India, PAN and a valid document for KYC. Non-resident retail investors are eligible to invest in government securities under Foreign Exchange Management Act, 1999. An RDG Account can be opened singly or jointly.
Investors fill up an online form. Once their RDG Account is opened, details for accessing the portal will be conveyed through SMS/email. No fee will be charged for opening/maintaining the account or placing bids.
For primary market participation, only one bid per security is allowed. Payment can be made through net-banking/UPI. If UPI is used, funds in the linked bank account can be blocked at the time of submission of bids; the amount will be debited on allotment in the auction. A similar facility through banks will be made available in due course.
Allotted securities will be issued by credit to the investor’s RDG Account on the day of settlement. Refunds, if any, will be credited to the investor’s bank account.
For secondary market trades, registered investors can access a transaction link on the portal to buy or sell gilts. Securities bought will be credited to the RDG Account on the day of settlement. The RBI will announce the date of commencement of the scheme.
G-Secs add to the variety of debt investment options. Apart from interest income, investors can also make capital gains by trading in gilts, depending on the trajectory of interest rates. If an individual holds a bond carrying a yield of 6%, a rise in bond yields will bring the price of the bond down. So, if he wants to trade the bond before maturity, the rise in yield results in capital loss. On the other hand, a drop in yield below 6% would benefit the investor as the bond price will rise.
Investors also face low reinvestment risk in case they are saving for retirement. While fixed deposits are available for a maximum tenure of 10 years and thereby expose the investor to reinvestment risk, a G-Sec investor can lock himself at the current yield for 20-30 years.
Since G-Secs are highly volatile, investment experts say investors who really understand these instruments or are willing to hold till maturity should look at them. Many argue that although these are safe-asset class, it is better to invest through mutual fund schemes that invest in G-Secs. For investors who are willing to hold till maturity and are not bothered by volatility, one of the advantages of going direct is that they will save on the expense ratio charged by mutual funds.
G-Sec attracts tax on both interest income and capital gains if the papers are traded in the market before maturity. Interest income attracts tax at the marginal tax rate, and capital gains at 10%. G-Secs don’t attract capital gains tax if the papers are held till maturity.
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G-Sec yields move on account of various factors, and investors will need to keep an eye on both domestic and global developments. In the market, people say fixed-income investors sink and sail with the direction of interest rates. Investors suffer capital losses in a rising interest rate regime, and make capital gains in a falling rate environment. This risk is eliminated when gilts are held till maturity.
Inflation and interest rates, in turn, are affected by various other factors such as economic growth, sovereign rating, money supply, government borrowing, global liquidity and geopolitical developments. So investors need to be watchful of all this.